Draconian or not Draconian, this is the question?

IACCM IT Roundtable - 01/03/2009

The roundtable, held in London, UK, brought together leading figures from an assortment of both buyers and suppliers from companies such as Centrica, Siemens, QinetiQ, Pfizer and the International Association of Contract and Commercial Management (IACCM). Its purpose was to discuss best practice techniques to maintaining strong supplier/buyer relationships in the current economic downturn.
The current economic downturn has placed many companies in a difficult position with respect to their supply chains, with the management of cash flow and supplier sustainability becoming increasingly important. This has resulted in some companies taking a very radical and hard line with their suppliers, according to Greg Brownlee, Managing Director of commercial and contract management consultancy Blake Newport. Greg highlighted the construction industry as an example: “Back in the summer of 2008 a lot of house builders were writing to their suppliers and telling them that they were taking a five percent discount off their invoices, This was non-negotiable. Many companies were in fact advising their suppliers that if they didn’t like it, they could tear their contract up!”
“This is a very draconian measure to take”, says Brownlee. “The parties to a contract should honour the obligations and the requirements signed up to. Should circumstances change, both parties should agree what changes, if any, are required to a contract. Protection rather than damage to your supply chain in these uncertain times should be paramount”. The real issue he highlights is how this will affect those who work in the commercial department of organisations. “As commercial managers should we be tasked with unduly pressurising suppliers and looking up the line to see where we can cut the cloth with clients? Or should it be a more pro-active and elegant approach to actually manage tougher times rather than the ‘large stick’ approach that we have seen in other industries?”

The majority of attendees disagreed with an aggressive approach, believing it to be a short-term fix only.

"It always comes back to bite you," says Heather Rodgers, head of procurement and supplier relationship management at Centrica. “We put a lot of time and effort into our key suppliers and they almost always become an extension of our business, in both the good and the bad times, with the most important suppliers for us being the ones that work with us in these really tough times. What I really like is where we’re working with some of those suppliers, and looking at their processes more broadly. Although they might not be able to do anything in direct relation to us, we can actually help them to remove a huge number of costs from their dealings with other companies.”

It’s all about constant reviews and adjustments says Rodgers. “I actually find that a pro-active approach helps you get through the tough times. It’s not an opportunity to review the way we are doing something and remove costs in a different way other than just cutting them right back. At the end of the day we play a key role in driving down the costs and making sure that the quality is there.”
Greg Brownlee explained the importance to good business of building better relationships. “The benefit of having long term relationships with a supplier is that there is a level of trust there, meaning that you can actually work together to save costs. More importantly the short sighted and draconian approach to cutting contracts with suppliers may actually cause them to go out of business. This in turn causes a lot of organisations major problems because the supplier will then need to be replaced. This is often not something that can be done overnight and in all likelihood will be more costly. The end result is ultimately a negative impact upon what you yourself are delivering.”

And for some, such as QinetiQ's commercial director Chris Mead - who is reliant on a high number of specialist suppliers - making draconian demands on suppliers is simply not an option. “My company has a different challenge with roughly a third of our revenue supported by a single source supply chain. With a lack of competition in the supply chain and the needs we face from our customers - who are in essence government departments - we don’t have the option of sending them a tersely worded email saying cut five percent off your price! It’s therefore about sitting down with people and getting them to have a sensible conversation with you. The question is how to get to that point and how much have you spent in the process of doing it.”

Tim Cummins, Chief Executive of the IACCM, believes buyers should be looking for some kind of ‘balanced renegotiation’. He commented "I actually see it as unethical not to renegotiate contracts, in the sense that a contract's purpose is to give both sides a reasonable basis for planning, based upon the commitments and responsibilities they are able to assume at that time. Clearly the current circumstances should really drive companies towards this approach and to undertake an honest reassessment of their respective needs and capabilities.”

“Not paying suppliers in a credit crisis is not only going to potentially destroy some of your supply chain, but it will also certainly destroy any opportunity that you had to build trust,” he added. “In a world where everyone is talking about needing to build trust and behave ethically, then this sort of behaviour is clearly something that is not only counter to your business interest from the point of supplier relationships, but also to your public image.”

This view was mirrored by those around the table and proactively checking the financial health of suppliers throughout their relationships, not only at the start, was highlighted as critical.

"We tend to be quite good on the upfront financial due diligence, but it's not always a well-developed ongoing discipline at present and we need that right now," says Colin Davies, Senior Director of worldwide procurement at drug company Pfizer. “An ongoing system of checks would allow buyers to see earlier if suppliers were running into trouble, or needed assistance, and they would then be in a position to help them to act.”

But Tim Cummins believes the whole contracting process may need to be revised in light of the current situation. “It’s actually to the broader point that a number of companies have been emphasising for some time, which is that the global economy has brought with it a dramatic increase in the frequency of change. Obviously what we are going through at the moment is a key example. None the less, with the speed of technology change and the speed of new opportunities occurring, we could argue that we are all dealing with a far more volatile environment than we were twenty years ago. Yet many of our behaviours and many of the ways in which we go about contracting in particular remain very much unaltered”.

“I think this whole issue of how you structure contracts might need to now incorporate much more flexibility and allow for the ‘management of change’ and this is something I think many are beginning to recognise – and this is also something they need to become far more sophisticated at. Contracts aren’t about getting a document signed and sticking it in a drawer, it’s actually about having a living framework so that the relationship is governed throughout its life-cycle. In order for that relationship to then evolve over time it needs to be positioned and structured in a fairly flexible way.”

But it’s only now in this current economic climate that relationships are being tested, as Greg Brownlee explains. “Positions of trust or relationships built on trust that have formed through the good times only really come into their own in the bad times, because that’s when they are tested to the maximum - do I trust this guy and does he trust me when it comes to survival!”

Brownlee added. “There is a very real importance to maintaining your supply chain and particularly monitoring and mentoring your suppliers. I think we will all need to be proactive rather than reactive in the commercial and contract management of our suppliers in these times of uncertainty, in order to ensure that the organisations we work in don’t end up as front page headlines in the Financial Times. I think we all probably need to work harder to do things better and to make sure that the right systems, people and processes are in place to make sure that once the downturn ends we are all in a good position to take advantage of the good times.”

Blake Newport is an IACCM Corporate Member. For more information about Blake Newport and its services, visit http://www.blakenewport.co.uk/

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