Category Archives: How to Collaborate

Managing Uncertainty through Collaboration

           “We demand rigidly defined areas of doubt and uncertainty!”    – Vroomfondle the Philosopher, in Douglas Adams The Hitchhiker’s Guide to The Galaxy (1979).

Introduction

In our previous blog, we explored how collaborative management of risks and opportunities can lead to superior outcomes. Whilst issues (known knowns) and risks (known unknowns) can be relatively easy to manage, a more critical challenge arises with uncertainty. Uncertainty can manifest itself as either:

  1. Unknown knowns. Things we know about, but we may have incomplete information about their likelihood or consequence.
  2. Unknown unknowns. These are simply things that are not contemplated (sometimes referred to as unfathomable uncertainty).[1]

We previously mentioned that a contract is a tool that is used to allocate risk but how can we manage uncertainty where the risk is simply not contemplated, or risk likelihood or consequence cannot be reliably quantified?  This blog explores strategies on how we can effectively craft a commercial model that better deals with uncertainty. 

When to Focus on Uncertainty?

Whilst uncertainty is relevant to all commercial dealings, the impact of uncertainty is more likely to arise within certain environments. Remington and Pollack offer a useful framework to help us gauge the level of complexity in a project, and hence where we need to focus our efforts in dealing with uncertainty.

  1. Structural Complexity. Many interdependent systems or components
  2. Technical Complexity. New technologies or new ways of business
  3. Directional Complexity. Many diverse and influential stakeholders with competing needs.
  4. Temporal Complexity. Unanticipated changes in regulations, law, and environment.[2]

In summary, high complexity often creates an environment where uncertainty is more likely to have an impact of the delivery of outcomes. How then do we create a commercial model to effectively deal with uncertainty?

Crafting a Commercial Model to Deal with Uncertainty.

Traditional arms-length contracts are often underpinned by waterfall development life cycles whereby the principal provides the contractor with a specification, statement of work, and conditions of contract to deliver the contract works.  In complex environments, such approaches are often unsuitable as uncertainty introduces change and emergence that is often not contemplated in the contractual risk allocation framework and procurement documentation.  We may therefore need to adopt a more exploratory procurement model where we ‘probe, sense, respond’ rather than the traditional ‘sense, categorise, respond’ approach we see in simple procurement activities.[3] There are several ways to achieve this including:

  1. Contracting for incremental outcomes and exploiting prototypes. An evolutionary approach mitigates many of the challenges associated with uncertainty by allowing us to ‘probe’ the environment, explore the art of the possible, and create ‘early wins’. Incremental approaches also provide natural ‘off-ramps’;
  2. Maximise tradespace.  Providing maximum flexibility and agility to trade off cost, schedule, and performance parameters. This approach allows a collaborative means to realise benefits even when new, significant risks and issues emerge; and
  3. Create an adaptable organisation and culture that can cope with change. Traditional approaches rely on stable requirements, certainty, and linearity. To effectively deal with uncertainty we need to create an environment where all key stakeholders understand that change is a natural part of the process and we have the right leaders to communicate how change can be an effective tool to achieve the project ‘vision’.

Recognising that there is no pre-ordained path to delivering outcomes will go a long way to helping us deal with uncertainty, but we still need to get into the contractual ‘nitty gritty’ of managing change, implementing suitable risk and reward mechanisms, and dealing with the prospect of cancelling the contract if uncertainty jeopardises the business case. 

Change Management Processes 

Uncertainty can create significant challenges including increased costs, delays, and force change in delivery methods.  Anticipating all possible permutations that may occur throughout the contract lifecycle is a fool’s errand so we must implement robust and fair change management processes.  We need to remind ourselves that there is no price competition associated with variations in a contract so we must ensure any change management process balances fairness, timeliness, and value. This is where a culture of collaboration will reap dividends. Where parties work on a best for project basis with shared goals, and shared information; change management will be far more effective.   Collaboration also allows opportunities to be recognised and exploited when circumstances change.

Risk and Reward

Traditional fixed price, arms-length contracts are unsuitable for contracts involving high uncertainty. A commercial model is therefore required to encourage parties to fix the problem and not the blame when new risks emerge.  A firm fixed price contract where suppliers face unlimited liability for all risks and with no recourse to force majeure will drive the wrong commercial behaviours. Similarly, a cost reimbursement contract where the buyer assumes all risks will unlikely deliver value for money. As we have stated in many previous blogs, a commercial model is needed where buyers and suppliers both have ‘skin in the game’ and are incentivised to work collaboratively to proactively manage new risks and exploit new opportunities. 

Termination

Where a magnitude of change arising from uncertainty is significant, then this could jeopardise the procurement business case or value proposition. In such circumstances, termination or significant rescope of the project must be considered.  Collaboration is necessary to ensure a seamless closure of the project, reduce disputes, and capture lessons learned.  Preservation of business relationship is also of critical importance. By adopting collaborative contract principles, we are more likely to effectively manage radical changes in scope.  We need to make sure that the commercial framework supports timely exchange of information so that there are ‘no surprises’ for either buyers or suppliers.  Termination clauses must also be reasonable, fair and therefore contemplate ‘reasonable de-mobilisation costs[4]

Conclusions

Dealing with uncertainty is something that is often overlooked in contract management as this is a very hard topic to deal with.  Collaboration is a key tool when dealing with complex projects where we anticipate uncertainty. We need to make sure we manage stakeholders effectively, implement robust and fair change management processes and establish a commercial framework where all parties share in risks and rewards.


[1] Kim, S. D. ‘Characterizing unknown unknowns’ (2012) PMI Global Congress 2012—North America.

[2] Remington, K., & Pollack, J. Tools for Complex Projects (2007)

[3] David J. Snowden and Mary E. Boone ‘A Leader’s Framework for Decision Making’ Harvard Business Review (November 2007).

[4] Gray A. ‘Unfair Contract Terms: Termination for Convenience’ [2013] University of Western Australia Law Review 12 (2013) 37(1) 229 at 250.

Benefits Realisation Through Joint Management of Risk and Opportunity

Small opportunities are often the beginning of great enterprises.” – Demosthenes (384 – 322 BC).

Introduction

The overwhelming majority of commercial arrangements are underpinned by contracts.  The contract is largely used as a tool to allocate risk but the way we often use contracts to manage risk is ineffective for many reasons.  First, there is asymmetry of information where parties are unaware of what risks actually exist, what the likelihood of risks are, and their consequences. Secondly, the risk allocation process is often controlled by the buyer and this often results in unfair risk allocation. Thirdly, we become so obsessed by managing risks that we fail to explore opportunities and value creation.   In other words, we end up leaving substantial value on the table during negotiations and beyond.  This blog explores strategies to improve the way we manage risk and opportunities through collaboration.

Risk and Opportunities Identification

It would be remarkable if a buyer fully comprehends all relevant risks associated with the goods and services they are procuring.  It is highly likely an asymmetry of information[1] exists whereby the supplier has a more comprehensive and accurate understanding of the risks associated with their deliverables.  Similarly, suppliers may not have a full appreciation of the customer’s environment, constraints, and motivations.  Typical commercial negotiations are underpinned by this bilateral asymmetry of information and this results in suboptimal outcomes.  There are some strategies that are often used to counteract an imbalance of information such as:

  1. Contracting for an ‘outcome’ rather than a ‘thing’,
  2. Relying on price competition to ensure price (not necessarily value) is fair,
  3. Performing due diligence such as referee checks, customer testimonials, exploring defect rates etc.

Whilst the above strategies may provide some confidence that the goods and services provided are fit for purpose, there are significant limitations where competition is constrained, there is a selection bias in referees/testimonials, and with the failure explore value creation. 

Rather than adopt an arms-length commercial approach, a collaborative approach with early engagement is far more likely to capture all relevant risks associated with the contracting function but more importantly, identify opportunities to create value. This can be achieved with buyers and suppliers working together in a joint risk and opportunities workshop to gain a better understanding of the risks and opportunities upfront. 

The two stage Early Contractor Involvement (ECI) contract is a very good example of collaborative risk and opportunities management. Under the ECI process, the buyer and suppliers work together early in a preliminary stage to jointly identify risks and opportunities in a collaborative fashion.[2]  All options can be explored in this stage, there should be no unnecessary constraints.  Once complete, the parties further work together to explore who is best placed to manage the identified risks. This may involve risk transfer or even risk sharing. Insurance brokers may also be invited to participate in these workshops where risks can be allocated to third parties.  We need to recognise that this preliminary stage does not have a default risk allocation strategy, a default contract template, or pre-defined remuneration strategy. It is up to buyers and suppliers to jointly work together to determine the most suitable commercial framework well before the head contract is signed.  Working together collaboratively eliminates most of the challenges associated with asymmetry of information and ensures the final cost estimates and schedules are realistic.[3] 

Fairness in Risk Allocation

Joint management of risk and opportunities will inherently support fairness in the commercial relationship. We mention previously in collaborative contracting blogs that unfair risk allocation can severely erode value:

Inappropriate allocation of risk resulted in a 14 percent increase in costs to projects. Of this amount, the customer was liable for 78 percent of the cost increase.[4]

We discussed the downsides of unfair risk allocation in our blog on commercial models  but what are the benefits of fair risk allocation?  Fair risk allocation eliminates many unwarranted contingency fees or management reserve being added to the supplier’s contract prices.  More importantly though, a fair and equitable commercial framework encourages parties to share information, explore continuous improvement and innovation, and focus efforts on pursuing opportunities.    A focus on risk transfer does the exact opposite.

Consider a firm fixed-price arms-length contract where the customer allocates as much risk as possible to the supplier.  In this situation, the key motivation of the supplier is to spend all their efforts on risk abatement, deliver outcomes only within the strict boundary of the contract, and ignore any deviations from the contractually delivered ‘plan’.  If we are serious about benefits realisation, a more considered approach is needed that;

  1. Encourages joint risk and opportunities management;
  2. Ensures a risk and reward structure is implemented that is fair and reasonable;
  3. Encourages parties to work towards delivering enterprise goals (which also includes a vibrant, sustainable, and profitable supply base);
  4. Focusses efforts on fixing the problem and not the blame; and
  5. Tolerating prudent risk taking, consistent with the approach of fail fast, fail cheap, fail often, fail safe, and fail smart.[5]

A joint approach to managing risk and opportunity registers with a single of truth is far more likely to foster innovation and value creation. A single source of truth that represents a holistic picture of project risk is also far more valuable to all stakeholders.  This can be achieved via a joint liability risk assessment or risk log that explore risk as a probability distribution.  The quality of this risk assessment will also be far superior as both buyers and suppliers are involved.  A probabilistic analysis can be undertaken to explore most likely, worst case, and best-case scenarios for delivering outcomes. Buyers and suppliers can then adopt a mutually informed negotiation process to reach a commercial agreement but more importantly, all parties can work collaboratively to mitigate risks. 

For those that want to explore probabilistic risk assessments further, I have developed a creative commons (free for commercial use) liability risk assessment template which converts three-point estimates for any number of risks into a probability curve and cumulative probability distribution. This tool is based on a PERT Beta distribution[6] using a 10,000 point Monte-Carlo simulation.  The tool allows users to derive expected value (p50) and best case/worst case estimates for known risks. This tool provides an understanding of the spread of risks on a project and informs the best commercial model for both buyers and suppliers and can be downloaded from the below link.

Monte Carlo Risk Analysis Tool

Dealing with Uncertainty and Estimation

Managing the known risks is arguably the easy part. Crafting a commercial framework that effectively deals with uncertainty (the unknown unknowns and known unknowns)[7] is far more challenging. The traditional approach of dealing with uncertainty with indemnities and managing change through variations rarely delivers value. The topic of our next blog will explore strategies to craft a commercial relationship that does effectively deal with uncertainty. 

Conclusions

Managing risks and opportunities jointly through early industry engagement is far more likely to create value. A shift to collaborative risk and opportunities management though does require a move away from traditional boilerplate contracts and tender evaluation processes. What is needed is a commercial model that explores risks and opportunities at the enterprise level and drive parties to proactively explore these opportunities to realise joint benefits.


[1] George A. Akerlof ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ The Quarterly Journal of Economics Vol. 84, No. 3 (1970).

[2] Roger Quick, ‘Queensland ECI Contract’ ICLR [2007].

[3] Queensland Government Chief Procurement Office Procurement Guidance Series “Relational Procurement Options – Alliance and Early Contractor Involvement Contracts” (2007) at http://alliancecontractingelectroniclawjournal.com/wp-content/uploads/2017/06/Queensland-Government-Chief-Procurement-Officer-ND-Relational-Procurement-Options-Alliance-and-Early-Conractor-Involvement-Contracts.pdf

[4] CII Research Report RR210-11 “Contracting to Appropriately Allocate Risk” (2007) summarised in Altman R., Cruz J., Halls, P “One-sided Contracts: Do They Pay Off?” ACCL Vol 11 1 (2017) p 169.

[5] US Government “Innovative Contract case Studies” (2014), p20.

[6] Vose D., Risk Analysis: A Quantitative Guide 3rd ed (2008) pp 672-4.

[7] Respectively referred to as ontological and epistemic uncertainty.

Agile and Collaboration (Part 2)

In the volatile modern world, flexibility is essential to the survival and success of an organisation” – G. Stracusser[1]

Evaluation and Planning. L.Ruigrok (2020)

Introduction

In our previous blog we explored the features and problems associated with agile procurement approaches. The key challenges with agile procurement stem from the fact that flexibility and responsiveness are not compatible with traditional procurement approaches and associated contracts that attempt to clinically allocate risks between the parties. Similarly, agile approaches require a substantial shift away from business as usual approaches and this demands an organisational cultural shift as well as effective leadership to drive the right outcomes.

Suppliers as Custodians

Traditional, arms-length procurement approaches are suitable for low risk, non-critical procurement but where we wish to successfully implement agile procurement then we need to fundamentally reassess out business relationships. Agile demands flexibility to achieve faster time to market, better meet customer requirements, better deal with emergence, and reduce disputes. This cannot be achieved with a traditional vendor relationship. Rather, we need to change the way we look at suppliers and consider them as trusted partners or custodians of our business. No doubt this makes traditional contract managers exceptionally nervous (from both the buy and sell side) but this change in thinking is necessary for the following reasons:

  1. Bringing suppliers ‘inside the tent’ provides them with greater access to customers, rather than dealing with the contract management team as the gatekeepers. This subsequently allows for timely and more effective decisions, and ensures goods and services are fit for purpose;
  2. Integration of suppliers with common information systems, inventory management systems, risk management systems, and decision support systems provides a timely, single source of truth. As a result, decisions can be made faster and more accurately;
  3. Fixed price arrangements are very difficult to implement in agile environments. As a custodian working closely with the buyer, almost real time evaluation of supplier performance and value can be assessed. This provides a more robust remuneration governance framework than a simple cost reimbursement approach where there is no incentive to minimise costs; and
  4. When things inevitably go wrong, parties should be incentivised to ‘fix the problem and not the blame’.  As a custodian or partner, suppliers are more likely to work towards the customer’s enterprise outcomes rather than their own short-term commercial interests.

Though the above benefits are enticing, we need to be alert to the challenges associated with suppliers as custodians with; potential dilution of accountability, the risk of fiduciary duties arising, and the risks of ‘vendor lock in’.  Appropriate governance and performance management frameworks must be in place to deal with these issues.

Organisational Design

Every company that has tried to manage mainstream and disruptive businesses within a single organisation failed.’ – J. Bower and C Layton[2]

Traditional procurement is often underpinned by stovepipe organisations. This is especially so in large organisations where separate departments and business units work separately in the procurement lifecycle with; the marketing department exploring ‘features and benefits’, engineering departments developing and implementing specifications, commercial departments drafting the contracts, and finance teams crunching the numbers. These activities are typically sequential and often lead to delays, confusion, and a general lack of accountability.  For agile procurement, these stove pipe approaches are unsuitable.  As observed by Nicoletti, an ‘agile business model’ is required with agile processes that maximise the opportunities for automation.[3] In practice, this means:

  1. a single, accountable authority who is delegated decision-making for the agile procurement activity;
  2. an integrated team comprising all the necessary skills and disciplines needed for the procurement activity, including the customer;
  3. streamlined processes that are focussed on delivering an outcome rather than delivering a ‘thing’;[4] and
  4. maximising the opportunities for automation (efficiency, economy, and effectiveness).[5]

Implementing a complete agile procurement suite across the whole business would be a herculean task but there is no binary choice here.  Organisations can adopt the full raft of agile procurement approaches for those activities where it is required and roll out partially agile approaches for the remainder of the business.  For example, automation and streamlined processes could successfully be implemented across the whole enterprise but highly skilled, multidisciplinary teams may be reserved for those activities where the greatest need for flexibility is required.  Organisations facing a transition to agile procurement approaches would likely face significant challenges if they adopted a big bang approach to implementation.  The mix and skills of personnel required in a completely agile procurement environment would also introduce challenges.

Cultural Alignment

Moving to an agile procurement environment will undoubtedly require a cultural shift in many parts of the organisation.  It is rare for large organisations to have a single, homogenous culture, rather there are likely to be cultural islands.[6]  A new cultural island may be required for those business units that are required to operate in an agile fashion. Alternately, a more ambitious approach is to shift the whole organisation to an agile culture.  The latter approach is exceptionally risky even though the rewards are likely to be much higher.  What is important when adjusting culture is that expectations are managed, and change is implemented to achieve enterprise outcomes.  Expectation management requires us to recognise that:

  1. Flexibility and agility come at a price. Long term pricing arrangements, bulk purchasing rebates, and efficiencies with boilerplate processes will be eroded. Nonetheless, the loss of these benefits should be eclipsed by the value offered by an agile, customer focussed, responsive organisation;
  2. The organisation must have a greater appetite for sunk costs and rework.  Consistent with the Fast, Inexpensive, Restrained and Elegant, and other innovative procurement methodologies; we should accept failures so long as failures are ‘fast, cheap, often, and smart’;[7]
  3. The full range of benefits will only be realised when buyers and suppliers work together collaboratively
  4. We must accept shorter planning cycles. Strategies are enduring but planning cycles must be shorter to deal with emergence and support agility.  Five-year plans are anathemic to agile procurement approaches. Our business cases must be regularly updated, revised, and even rejected as new information becomes available.  Continuing viability of plans must be undertaken;[8] and
  5. The organisation as a whole must be resilient and adaptable. Emergence means that people and processes must be aligned to allow the organisation to pivot as required. This can introduce challenges with change fatigue.

Conclusions

An agile organisation offers substantial benefits so long as the organisation is effectively designed with the right culture and with expectations managed accordingly.  Agile approaches will be successful if they are underpinned by small, self organising, multi-disciplinary, collaborative, high performing teams.[9] Assigning grandiose titles to these teams such as ‘tiger teams’, ‘black belts’ or ‘scrum masters’ is not important. What is important is to ensure these teams have the right people, with the right skills, and the right delegations to achieve enterprise goals. 


[1] Straçusser, Glenn Agile project management concepts applied to construction and other non-IT fields (2015) https://www.pmi.org/learning/library/agile-software-applied-to-construction-9931

[2] J. Bower and C Layton ‘Disruptive technologies – Catching the Wave’ Harvard Business Review Jan/Feb 1995 Vol 73 Iss 1.

[3] Bernardo Nicoletti  Agile Procurement: Volume I: Adding Value with Lean Processes (2018) p4.

[4] J. Millis & A. Freeman ‘Agile contracting for Australian Government agencies (2018).

[5] Bernardo Nicoletti  Agile Procurement: Volume I: Adding Value with Lean Processes (2018) p4.

[6] E. Schein, Organizational Culture and Leadership 4th Ed (2010), p 271.

[7] US Government ‘Innovative Contract Case Studies’ (2014) pp24-25.

[8] Managing Successful Projects with Prince2 (2017) [6.2].

[9] F. Brooks “Mythical Man Month” (1975)

Driving Collaboration with Joint Governance Arrangements

Well, everyone can master a grief but he that has it.” – W. Shakespeare ‘Much Ado about Nothing’ (1599)

Why Pursue Joint Governance?

To realise the full range of collaborative benefits, parties should adopt a joint approach to problem solving, risk management, communication, and decision making.  In other words, a joint governance approach is required as recommended by ISO 44001 Collaborative Business Relationships:

The partners shall establish and agree a formal foundation for joint working, including contractual frameworks or agreements, roles, responsibilities and ethical principles. A joint management team shall be established from the initiating organisation and its collaborative partner.[1]

Included in the governance structure is a need for:

  1. Joint Communications,
  2. Joint Knowledge Management,
  3. Joint Risk Management, and
  4. Joint Issues Resolution.[2]

Figure 1 below illustrates the key processes required for parties to work together collaboratively.

Figure 1 – ISO 44001 Working Together Processes[3]

Successful collaborative outcomes may not necessarily require all the above process to be joint. In some situations, it may not be possible to have a fully joint approach as each individual entity may face their own governance, legislative, and commercial constraints that prohibit sharing of all risks and information.  What the evidence shows is that where organisations are more tightly coupled and share information, superior value is more likely to be delivered.[4] 

Implementing Joint Governance

A joint governance approach is not something that is added to a relationship after contract signature, rather joint governance must be implemented throughout the procurement lifecycle.  The following areas should be contemplated to realise collaborative benefits:

Joint Risk Management.  Where parties work collaboratively to identify all relevant risks then a project is more likely to be successful. If each party manages their risks severally then there is greater scope for errors of omission and errors of commission in the risk management process.  Ideally, parties should engage collaboratively in the very early stages of a project (prior to contract signature) to run joint risk workshops and follow this with a joint liability risk assessment. This activity should then be followed by negotiated risk transfer where buyers and suppliers jointly agree who is best able to manage risks. The sharing of risks should also be contemplated here where appropriate.  Negotiated risk transfer approaches are often used in two stage managing contract approaches.[5] Once the contract is afoot, joint risk management should continue to; ensure there is a single source of truth with risks, effectively deal with new risks, and provide transparency in the relationship.

Joint Decision Making. A fully collaborative venture should pursue joint decision making to the maximum extent possible. Joint decision making encourages collaboration, reduces adversarial behaviours, and allows for greater agility and responsiveness in commercial dealings.  Joint decision making is a common feature of project alliances and other highly collaborative contract arrangements.[6] For many organisations, the prospect of joint decision making can seem daunting. Joint decision making does not mean that every commercial decision must be joint, rather those decisions relevant to project delivery should be joint. Joint decision making may be implemented at the operational level or even the programme board level.[7]  Where joint decision making is implemented, the prospect of deadlocks must be considered. Deadlocks may be resolved by the customer owning a ‘casting vote’ or through expert determination mechanisms.

Joint Communications. Collaborative ventures are far more likely to succeed where there is a common and timely communications framework. This is made clear in the Managing Successful Programmes framework; “the programme will need to control communications to ensure they are consistent, clear, timely and accurate”.[8] Coherence in communication mitigates the risks of disputes and issues arising and also supports a culture of ‘no surprises’.  Collaborative ventures should consider the use of shared systems to provide a common communications baseline.

Joint risk management, decision-making and communications should be integrated into the governance framework of the relationship making sure the contracts terms and conditions support such approaches. In addition to the head contract, the parties may wish to implement a joint program steering group that addresses the above.

Conclusions

Effective collaboration requires parties to work together to ‘fix the problem and not the blame’. This is far more likely to occur where parties engage in joint risk management, joint decision making and with joint communications. This does not mean that every decision must be joint, rather those decisions that would benefit from both buyer and supplier involvement should be joint.  Commercial frameworks need to be crafted to support joint outcomes. This is not just the contracts terms and conditions but also the statements of work, partnering charters, and other governance documentation.


[1] ISO 44001 Collaborative Business Relationships (2017) [8.6.2.1], [8.6.2.5]

[2] Ibid, pp 23-25.

[3] Ibid, Figure 7.

[4] See esp., UK Ministry of Defence ‘A Partnering handbook for Acquisition Teams’ (2008) pp 9-10; T. Lendrum ‘Building High Performance Business Relationships’ (2011); Arthur McInnis, ‘Relational Contracting under the New Engineering Contract: A Model, Framework and Analysis’ (paper presented to the Society of Construction Law, UK September 2003); State of Flux ‘Supplier Relationship Management Research Report 2012: Voice of the Supplier – A Step Closer to Mutual Benefit’ (2012).

[5] Queensland Government ‘Relational Procurement Options – Alliance and Early Contractor Involvement Contracts’ (2008)

[6] Australian Government ‘National Alliance Contracting Guidelines – Guide to Alliance Contracting’ (2015).

[7] Alexos, Managing Successful Programmes (2014) p 40.

[8] ibid, p 62.

Collaboration and Reputation

Just One Goat

‘Just One Goat’ – J. Davies (2020)

 

Collaboration and Reputation

“Regard your good name as the richest jewel you can possibly be possessed of, for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again.”  – Socrates (470 – 399 BC)

 Why Is Reputation Important?

Effective collaborative relationships are underpinned by trust, and by extension reputation. The reputation of an organisation is a strategic asset and a significant source of corporate value as observed by Eccles et al:

“…in an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations.[1]

There are significant examples of organisations who have destroyed corporate value because they did not adequately protect their reputation. These examples include poor risk management practices such as BP with the Deepwater Horizon Disaster,  fraudulent conduct such as Volkswagen’s emissions cheating practices,  and highly imprudent statements about product quality such as the Chairman of a large jewellery retail chain publicly stating that the company’s products are “complete crap”.[2]

Failure to operate your company is a ‘sound and business-like manner’ and with ‘reasonable skill and care’ is not only unlawful in most jurisdictions[3] but also a sure-fire way to erode value and destroy trust.  Doing what you say you are going to do, behaving ethically, and treating your customers with respect are all simple strategies to build up and maintain positive relationships. We also need to consider reputation more broadly between buyers and suppliers, especially with strategic suppliers and customers. 

The current global pandemic is generating extreme volatility and uncertainty in business relationships.  The temptation to retreat into silos with a ‘dog eat dog’ approach may yield very short-term benefits; however, smart companies will play the long game and focus on how the business will operate after the crisis is ended. In other words, these companies will look to preserve or even enhance their reputations

Strategies for Preserving Your Reputation in a Crisis

In a crisis, an organisation may be legally frustrated from delivering what they promised. This can apply to organisations involved from both the buy side and sell side. A black letter law approach would push businesses towards efficient breach of the contract or litigation to resolve the issue (often through legal technicalities) but as we know, such approaches destroy trust and annihilate opportunities for parties to work effectively with each other in the future. Organisations therefore need to explore options for win-win outcomes through the following:

Transparency. Be honest and do not surprise your suppliers or customers.  Early and frank disclosure will more likely preserve trust and allow for joint, mutually agreed solutions.

Demonstrate Leadership. Be a role-model to your teams, customers, and suppliers. Be proactive, be courageous, and do not let issues fester. Problems rarely go away by themselves.

Maintain Flexibility. Two millennia ago, the Roman statesman, Publilius Syrus stated that, ‘it is a poor plan that admits to no modification’. This tenet is especially relevant now. Organisations need to accept that existing Business Cases, Corporate Plans, Profit Forecasts, and Programme Charters are likely to be superseded by events. Stubborn organisations that do not adapt their strategies and plans will likely fail. Successful organisations, that work collaboratively with buyers and suppliers to promote flexibility and agility,  will more likely succeed.

Negotiate to Create Value. Negotiation does not have to be a zero sum game. Adopt a positive approach to negotiation that explores opportunities for both parties and the creation of value.

Fix the Problem and not the Blame. When the proverbial hits the fan, there is an overwhelming temptation to start pointing fingers. We need to resist this temptation and focus our energy on fixing the problem.

Adopting the above strategies will not guarantee preservation of goodwill but will be far more likely to avoid losing a cherished reputation. Organisations may also seek a crisis to enhance their reputation and prove that they can work collaboratively in both good and bad times.

Summary

When a crisis strikes, we naturally focus on short term survival. This is absolutely necessary where cash flow and solvency is at risk and other extreme risks or issues place business viability in jeopardy. Like Maslow’s hierarchy of needs,[4] we should not ignore these critical factors but at the same time we also need to be future focused and explore how the organisation will look and work at the end of the crisis.  Short-term survival does not have to be at the expense of long-term relationship building. Organisations now have a unique opportunity to demonstrate their affinity to collaboration in good times and bad.  Playing the long-game, from a collaboration perspective, should be a strategic priority.

[1] Robert G. Eccles , Scott C. Newquist and Roland Schatz “Reputation and Its Risks” Harvard Business Review February 2007.

[2] Gerald Ratner, After Dinner Speech to UK Institute of Directors (Apr 1991).

[3] Companies Act 2006 (UK) s174; Delaware General Corporation Law Delaware s145; Canada Business Corporations Act (1975) s122; Corporations Act 2001 (Cth) s180.

[4] Maslow, A. H. (1943). A theory of human motivation. Psychological review,50(4), 370.

Selecting the Right Partner for Collaboration

Motivation

Selecting the wrong partner can have dire consequences. Not only will the wrong partners erode the value we come to expect from successful collaborative ventures, but a bad experience with the wrong partners may jeopardise future attempts for collaboration as organisations may become more risk averse and less trusting.  In this blog we will explore strategies to select partners that are most likely to achieve collaborative outcomes. These strategies apply to both the buy and sell side of business.

Engagement Strategies

In the IACCM research report “Unpacking Relational Contracts”, the authors advocate the release of a request for partner rather than the traditional approach of releasing a request for quote or request for proposal.[1] This approach departs from our tradition supplier selection processes with the recognition that technical capability and price are not the only drivers for ensuring successful delivery.  The challenge for buyers then becomes “how do we evaluate supplier behaviours or likely behaviours?” From the sell side, the question becomes “how do I know my customer will engage in positive collaborative behaviours?”  The first point to recognise is that it is exceptionally difficult to evaluate parties’ behaviours in a one-off, remote, ‘paper based’ assessment.  In our blog covering commercial strategies, we recognised that early and ongoing engagement between buyers and suppliers is crucial to establish a shared vision, effectively manage all risks and opportunities, and sow the seeds of collaboration.  Early engagement also offers unique opportunities for the parties to evaluate behaviours and where appropriate, recalibrate these behaviours. 

Evaluation Methodologies

Desktop analysis of bids can reveal some insights into the capability and capacity of a prospective partner’s behaviours and the ability to collaborate.  Exploration of past performance, referee checks, and commitment to collaborative frameworks such as ISO 44001 are all useful indicators, but they are likely to be insufficient for the following reasons:

a.      Past performance may only be relevant where the tendering entity has previously worked within the buyer’s organisation.  Successful collaboration is a two-way street.

b.      Past failures could be largely attributed to adverse buyer or customer behaviours;

c.      New entrants will not have a track record (good or bad) for evaluation; and

d.       Tender responses inherently incorporate a ‘response bias’. If relationships and behaviours are included in the tender evaluation criteria, then no credible tenderer will claim that they are unable to achieve the desired collaborative outcomes.

There is also a more subjective element associated with evaluating supplier behaviours.  Some critics of alliance selection processes have labelled the selection process as a ‘beauty parade’.[2] To make evaluations more robust, a more interactive approach is needed. Not only must evaluation processes focus on measuring potential behaviours, but the process must also be transparent, fair, repeatable, reproducible, practical, and efficient.[3]

Try Before you buy?

Traditional desktop evaluation processes are unsuitable for evaluating supplier behaviours.  A more interactive approach is needed such as workshops and interviews.  Though additional resources and some probity risks may emerge with such approaches, the benefits far outweigh these costs.  Preparation is essential when conducting interviews and workshops. The expectations of all parties also need to be clearly defined.  One of the critical aspects of conducting workshops is to ensure that the actual delivery teams from both the buy and sell side are present.  That is, the actual key personnel who will perform the work will get to interact.  This will discourage suppliers ‘bidding with the A-team then substituting the B-team’. Likewise, this approach ensures the customer team is engaged prior to source selection and discourages arms-length centralised procurement control. Workshops need to explore business as usual as well as high stress scenarios. In my experience, high stress scenarios should be credible and explore how the parties will react collaboratively to achieve enterprise outcomes whilst at the same time cater for the reasonable commercial needs of each party.  Workshops should not degenerate into contract negotiations. More specifically, the workshops should not overly focus on commercial terms.  Nonetheless, Van den Berg and Kamminga[4] recognise that interactive selection process may provide significant insights into the negotiating style of each party.

 What to Measure?

A cynic is a man who knows the price of everything and the value of nothing.” – Oscar Wilde, Lady Windermere’s Fan (1892)

 A key challenge for selecting the right partner is getting the right evaluation criteria.  Great mischief can arise where parties blindly follow prior tender selection criteria for similar activities or simply tack on a relationship management piece to a traditional selection process.  A top down process is recommended with evaluation criteria tailored to ensure the selected partner is most likely to deliver value.  Planning should also anticipate the possibility that no tenderer can deliver value, and hence, the selection process may need to be abandoned.  There is a plethora of checklists, guides, and best practice available to assist in crafting evaluation criteria for collaborative contracts.[5] At a high level, we could use the four-C model[6] of

a.            Cooperative Culture

b.            Complementary skills

c.             Compatible Goals

d.            Commensurate levels of Risk

Alternately, we could use a more comprehensive evaluation process. Peter Simoons offers a helpful partner selection checklist in his book The 4-step Guide to Partner Selection Not only does this checklist include the attributes we would expect from a collaborative partner such as culture, vision and management styles, but the checklist also address the key hygiene factors we need to consider from a collaborative partner.  For example, compatibility with decision making speed is addressed with the criteria “How do you and your partner align in speed of operation and “decision-making?[7] Where the relationship demands agility and flexibility, selecting a local partner who is governed by an overseas parent who makes all financial decisions at the board level could introduce insurmountable problems to delivery.  In summary, checklist and guides should be used as aide-memoirs and should not be blindly copied without suitable tailoring.

Conclusion

Effective partner selection most focus on what is important to the relationship and how this will achieve the desired enterprise outcomes throughout the partnership.  Selecting the right partner for a collaborative venture should involve interactions and dialogue that allows both parties to observe the behaviours of each other and to also reflect upon their own behaviours. 


[1] D. Fydlinger, K. Vitasek, T. Cummins, J. Bergman – IACCM Research Report “Unpacking Relational Contracts (2016) p23.

[2] B. Lloyd-Walker & D. Walker Collaborative Project Procurement Arrangements (2015)

[3] Adapted from NSW Government ‘Tendering Guidelines’ (2011)

[4] Van den Berg, Matton and Kamminga, Peter, ‘Optimizing Contracting for Alliances in Infrastructure Projects’ (2006) 23(1) International Construction Law Review p 18.

[5] See e.g. ISO 44001 Collaborative Business Relationship Management Systems – Requirements And Framework (2017); Australian Government ‘National Alliance Contracting Guidelines – Guide to Alliance Contracting’ (2015);  T. Lendrum Building High Performance Business Relationships (2011); J.M. Geringer, Joint Venture Partner Selection: Strategies for Developed Countries (1988);   P. Simoons “The 4-step Guide to Partner Selection” (2013);  Duncan Haughey “Supplier Selection Checklist” (2014).

[6] Yannis A. Hajidimitriou, Andreas C. Georgiou “Decision Aiding  – A goal programming model for partner selection decisions in international Joint Ventures” European Journal of Operations Research 138 (2000) 650.

[7] P. Simoons “The 4-step Guide to Partner Selection” (2013) p33.

When to Use Collaborative Contracts

In this blog we will explore when we should, and should not, pursue collaborative contracts.  We must remind ourselves that collaborative contracts are not binary structures involving either zero collaboration at one of the spectrum, versus an incorporated joint venture or alliance at the other end.  Collaboration can take many forms and is a scalable concept that must be tailored to the activity at hand.

Motivation

“Virtually all of the collaborative projects out-performed most defence projects” – UK NAO Good Governance ‘Measuring Success Through Collaborative Working Relationships’ (2006).

Firstly, we only pursue collaborative relationships where the benefits outweigh the costs.  That is, we have a motive for collaboration.  Cost and benefits though need to be considered in as broad as terms as possible and not just in terms of contract price.  Collaborative benefits may include:

  • improved prospects for repeat business
  • continuous improvement and innovation opportunities
  • increased likelihood for supplier participation
  • enhanced satisfaction for all employees
  • improved flexibility
  • less time wasted on disputes and issues management

Similarly, we also need to explore the ‘hidden costs’ associated with collaboration, which may include:

  • increased time and effort in tender evaluation and tender development
  • increased efforts in relationship monitoring and cultural alignment
  • supplier lock-in
  • increased likelihood of opportunistic behaviours.[1]

In summary, we first need to craft a robust business case when considering collaborative endeavours and ensure this business case is continually evaluated.

Means

Where collaboration is able to realise superior benefits,  then we should explore whether we have the means to engage in collaborative ventures.  We should ask ourselves if we have the right culture, appetite to risk, and internal capabilities to realise collaborative benefits.  The United Kingdom National Audit Office offers the following ‘gold standard’ for enabling positive working relationships. 

UK National Audit Office Gold Standard for Sustaining the right Cultural Environment[2]

The Australian Department of Defence Capability Acquisition Sustainment Group, in their Collaborative Contracting Better Practice Guide, also provides guidance to help ‘buy-side’ organisations gain insight into their ability to pursue collaborative outcomes through the use of a contract maturity model, which asks the following questions:

  1. Suppliers favour your organisation because it “always keeps its promises”, treats suppliers fairly, promotes trust, and minimises the cost of doing business.
  2. Both parties openly discuss “interests and desired outcomes” throughout the procurement lifecycle commensurate with the strategic importance of the relationship.
  3. Each contracting party understands the other’s goals and how to help achieve and quantify them
  4. The contract is viewed as a tool to plan and track business relationships
  5. Procurement practitioners are viewed as valued facilitators and integrators of stakeholder interests

Asking yourself, ‘do I have the capacity and capability to achieve these gold standard or contract maturity model outcomes’ will help you understand whether collaboration is the right step for your organisation.  If the answer is no, then leaders can take remedial action. Future blogs in this series will explore strategies to shift organisation capabilities and culture to better enable collaborative outcomes.

Opportunity

With the means and motive for collaboration established we now explore whether the right opportunities exist for collaboration.  The opportunities for collaboration will be driven by the commercial model, geography, and market power of buyers and suppliers.  Collaboration will only work where both buyers and suppliers are committed.  Opportunities for collaboration may be limited in the following circumstances:

  • A transactional environment where buyers and suppliers operate on a ‘take it or leave it basis’.
  • Inflexible governance arrangements exist (especially in the public sector) which inhibit the full range of relational outcomes. This is especially the case where compulsory competitive tendering rules are too onerous.
  • Key leaders and managers are unavailable to support collaborative outcomes.
  • Pre-existing and inflexible contract structures prevent the full range of collaboration outcomes. An example of this would be ‘government to government’ contracts such as Foreign Military Sales.

Even where some of these adverse features exist, there still may be opportunities to engage in some level of collaboration. 

When not to use collaborative contracts

Collaborative contracts should never be used where an organisation lacks the means to effectively implement them.  This may stem from an inappropriate organisational culture or lack of commercial maturity.  If an organisation is mostly ‘transactionally’ based, where disputes and issues are normally resolved by resorting to ‘lawyers at twenty paces’, then that organisation will be unlikely to engage in effective collaborative relationships. 

As we previously discussed, we therefore need to ask ourselves some very hard questions about our internal capabilities and the means to engage in collaborative ventures.  This could involve benchmarking the commercial maturity of the organisation through tools such as the International Association of Contract and Commercial Management  (IACCM) Capability Maturity Model or undertake a collaborative contract skills assessment under Supplier Relationship Management processes.  Organisations may also rely on performance scorecards to benchmark their relationships and skills in collaboration.

There is also an overwhelming temptation to pursue collaborative contracts to mask systemic failures in an organisation. When facing failure, the allure of collaboration may be seen as a quick fix.  Simply sticking a partnering charter on an existing contract and hoping for the best will unlikely create value.  Positive relationships and collaboration are necessary but not sufficient for success. That is, organisations must still make sure they address the key hygiene factors before they attempt collaborative contracts. This includes ensuring the following are addressed:

  • A clear and shared organisational vision
  • Leadership commitment
  • robust commercial skills
  • A mature Project Management framework

The evidence is clear that collaboration can deliver fantastic benefits both between and within organisations.  We need to ensure we implement collaborative contracts for the right reasons and understand what barriers exist to successful implementation. Future blogs will explore collaborative contract case studies of where things have gone well and where things have failed.


[1] Hikan Hakansson and Ivan Snehota, ‘The burden of relationships or who’s next?’, (11th IMP Conference Proceedings, Manchester, 7-9 September 1995), 522-36.

[2] UK NAO “Driving the Successful Delivery of Major Defence Projects: Effective Project Control is a Key Factor in Successful Projects” HC 30 Session 2005-2006 p7.

Collaboration? Why it’s elementary my dear Watson!

It seems that collaboration is everywhere nowadays.  Whether it is Ed Sheeran and Justin Bieber producing a number 1 single, designer Tommy Hilfiger and Formula 1 driver Lewis Hamilton delivering exclusive clothing lines to Apple putting CarPlay into a variety of cars.  Everyone seems to be doing collaborations.  But are they all as successful?

Recently, I put on my detective cap like the famous fictional British detective Sherlock Holmes to find out whether individuals and organizations are achieving success including whether they are using updated methods to improve collaboration.

The short answer is no, unfortunately, and a change is long past due!

It seems that most practitioners are forgetting that collaboration really is ‘elementary’ but are omitting a couple of important details.  They are still focusing only on both the financial and non-financial benefits. Not much is written in detail about the best ways to collaborate to get desired results.

Isn’t that what we all want?  If we prioritize financial gains only, haven’t we blindsided ourselves?  I made a similar point in my recent article published in the International Association of Contract and Commercial Management (IACCM) Contracting Excellence Journal.

It’s discouraging that although ISO44001:2001 Collaborative Business Relationships Standard offers an extremely well structured approach for establishing and maintaining collaborative business relationships and provides high level guidance on the process, the standard still does not offer much to help readers design a collaborative contract that gets results for all parties.

My experience is that despite the best intentions of an organization and the individuals within it to collaborate, without the motive, opportunity and means to collaborate, the chance of success is unfortunately very low. This becomes clearer if you take a closer look behind three words: motive, opportunity and means.

Motive (the why)

Prior to any collaboration you need a compelling reason for why either buyer or seller needs to collaborate.  Motive reveals why by highlighting the costs and benefits both on an individual basis (e.g. financial reward such as a bonus) and group basis (e.g. reduced costs and improved profitability).

For example, buyer and seller may want to collaborate to mitigate uncertainty in the scope of the commercial arrangement, or to review constantly changing and evolving technology.  This is then reflected in the commercial terms of the contract to ensure that both buyer and seller end up with a fair distribution of risk and reward with the arrangement being perceived as neither too generous nor too punitive.  Moreover, the benefits of collaboration could be linked to personal financial rewards.

Regardless, both buyer and seller should be clear about the reason why they want to collaborate, because a good motive is the cornerstone to our overall collaborative approach.

Opportunity (the what and the when) provides opportunities for buyers and sellers to collaborate through various events, forums and activities such as formal scheduled meetings, supplier forums, innovation or hackathons, etc.

The opportunity to collaborate needs to be part of the everyday culture for both individuals and organizations, but simply having both the motive and the opportunity is not enough to deliver collaboration.  Unless collaboration meetings are formalized as part of our daily, weekly, or monthly working routines, such opportunities will be first to go when schedule and resource pressures occur — and they almost certainly will.

Means (the who and the how) provides detailed guidance on who and how to collaborate when individuals and organizations are brought together through an opportunity.

The means refers to providing the right tools, including policies, guidance and processes so that people will naturally collaborate — assuming they have been given the right motivation and opportunity.

It could be as simple as ensuring the collaboration meetings have specific terms of reference (scope and limitations of collaboration) and standardized agendas. This should ensureeveryone is clear about the roles and responsibilities of each individual and organization.  This includes whether a meeting is co-chaired, whether either buyer or seller has an ultimate decision right — and, if there are disputes, how are these resolved?

The means can be even more complicated.  Examples could be determining the financial arrangements due to changes in scope, realization of risks, or sharing of cost reductions due to the successful implementation of continuous improvement and innovations.

In my experience, especially in very procedural and hierarchical organizations, if the means are not specified, you will not get the full benefits of a collaborative approach.  I’ve summarised this in Figure 1.

collaboration-diagram-1.jpg

Figure 1 : Motive, Opportunity, and Means of Collaboration

So, where does this leave us?

Successful collaboration continues to deliver benefits for both buyer and seller alike resulting in the need for more effective and efficient collaboration in our commercial arrangements.  We need to understand the fundamentals even though various policies and practices including guidelines and standards help us with this challenge.

Accordingly, I suggest that we think carefully about the commercial arrangements, and their underlying collaborative architectures to ensure there is motive, opportunity and means to collaborate.  After all, at the end of the day, collaboration should be ‘elementary my dear Watson!