October 21, 2021

In the News

	I. The Latest in Today’s Supply Chain Horror Story
	II. De-Risking Your Customer AR Portfolio

	III. The Simple Truths of Leadership Turn Common Sense into Common Practice
	IV. Paying Attention to Buzz Words or Clauses in a Construction Contract

Persisting supply chain issues are turning into a real-life horror story for many businesses across the globe. While it is not entirely clear exactly how long the nightmare will last, experts are certain it will not end anytime soon. 

Earlier this week, the World Trade Organization (WTO) said during the FT Africa Summit that supply chain problems are likely to continue for at least several months. Some experts predict the crisis could stick around even longer into 2023 and 2024 in some parts of the world. “When the Covid-19 pandemic crippled international trade, freezing supply chains, it was thought that global supply chain disruptions would be temporary,” according to a recent Credendo report. “However, they are continuing to wreak havoc in many sectors.”

Now, businesses are left scrambling to find ways to cope with rising commodity and shipping costs that accompany the severe supply chain disruptions. “Supply chains are sometimes not very transparent, even for different stakeholders in the same supply chain,” the Credendo report reads. “This makes it impossible to identify the different bottlenecks and therefore to solve the problem.”

The U.S. government is imposing short-term solutions hoping to alleviate some cargo bottlenecks. For example, the Ports of Los Angeles and Long Beach recently started operating on a 24/7 schedule in an attempt to reduce a record backlog of 157 ships waiting to unload. Moody’s Analytics predicts this increase in operations should improve container flow by about 10%. "We have about two weeks' worth of work sitting at anchor right now," Gene Seroka, executive director of the Port of Los Angeles, told CNN. "The question right now is: How do we segment this cargo?"

However, it is yet to be seen if this will be enough to solve the supply chain crisis permanently. Businesses are beginning to restructure and adopt new models to avoid supply chain issues in the future. “The current just-in-time supply chain model with a variety of suppliers in a variety of countries has revealed some limitations,” Credendo says. “Nowadays, the question of the reshoring of industrial production seems to be gaining momentum.”

Be sure to read the November digital issue of Business Credit magazine for a special in-depth look at today’s global supply chain crisis.

Often times the people who process a credit application for their company do not have input into the terms that are included in the agreement, said Amber Hamilton, CCE, senior credit manager at U.S. Silica Company, during last week’s NACM Credit Congress session, Writing Your Wrong: De-risking Your Customer AR Portfolio.

Hamilton stressed the importance of integrating the credit function into the contract process. “Many times, we have the sales or commercial team making all of the intricacies of the contract,” she said. “They talk about pricing, they talk about how [the customer] is going to get the product, how we're going to bill it, when [the customer] is going to pay us, and they dictate terms but they don't actually run the risk assessment.”

Hamilton noted that she has been fortunate to have a seat on the finance team at her company and be a part of the contract negotiation process. “We’ve had it for the last two years and we’re actually in a better position with a lot our contracts. We helped the commercial team understand the importance of the credit process, as well.”

Having the credit team process the applications and be part of the contract process has helped ensure that the party applying for credit is also the party signing the contract, she said. This is the first phase of Hamilton’s five-step process which includes:

1. Aligning the entity requesting credit with the entity responsible for payment.
2. Understanding the entity’s structure and all supporting entities.
3. Reviewing the creditworthiness of the entity.
4. Performing a market analysis to understand the strength of the entity’s financial position.
5. Executing a contract/agreement that minimizes the risks associated with the entity.

“Once you understand steps one through four, that's when you're able to execute the contract or agreement that minimizes the risks from an entity perspective,” Hamilton said. In addition to the steps above, she also discussed areas within the contract that creditors should review: the payment and invoicing section, the audit section, the force majeure section and the assignment section. 

In the payment and invoicing section, Hamilton advises looking at two important factors: payment terms and invoicing frequency. “This section is very important because it clearly defines how a customer is going to pay,” she said. For the audit section, it's important to understand the timeframe that companies are allowed to look at each other's books, she added. She recommended one to two years.

Ensuring there is a favorable force majeure section during contract negotiations has become very important over the past year, Hamilton said, because it “allows for proper allocation of risks if there's an unforeseen or uncontrollable event.”

Lastly, the assignment section allows for the transfer or reassignment of the contract. “Companies are merging; companies are getting acquired by other companies so it pertains to how a company is transferred or assigned to another company.” An added benefit from reviewing this section is the ability to detail how you want your contract to be assigned and how you’d like to mitigate risks from those assignments, and it allows you to lay out the parameters of how that assignment goes.

“The biggest thing is that contracting with an entity with a minimized risk will aid in de-risking your customer’s AR portfolio,” Hamilton said. “Just enhancing the strategy when it comes to focusing on that entity structure has very positive outcomes.”

Leadership is a complex endeavor, but it doesn’t have to be complicated. We often tend to make things more complicated than they need to be, and that’s true in the field of leadership. To prove my point, go to Amazon.com and search their book listings for the word “leadership” and see how many returns you get (but wait until you finish reading this article).

What if I told you the key to being a successful leader was to make common sense common practice, and to do that, you need to remember and follow some important simple truths?

We hold that belief and we’ve seen it proven throughout our careers. In our forthcoming book, “Simple Truths of Leadership–52 Ways to Be a Servant Leader and Build Trust” (Feb. 1, 2022, Berrett-Koehler Publishers), we share a collection of simple truths that reflect common sense practices people can use to make their work and life–as well as the lives of the people they care about–happier and more satisfying.

Effective leadership is an inside job. It is a question of the heart. It’s all about a leader’s character and intention. Why are you leading? Is it to serve or to be served?

The most persistent barrier to being a servant leader is a heart motivated by self-interest. Self-serving leaders put their own agenda, safety, status, and gratification ahead of others who are impacted by the leaders’ thoughts and actions.

The shift from self-serving leadership to leadership that serves others is motivated by a change of heart. If leaders don’t get their heart right, they will never become servant leaders.

The following are two critical simple truths and suggestions on how to be a trusted servant leader.

Simple Truth: “Servant leadership is the best way to achieve both great results and great relationships.”

Organizational leaders often have an either/or attitude toward results and people. For example, leaders who focus only on results may have trouble creating great relationships with their people, and leaders who focus mainly on relationships may have trouble getting desired results.

 Yet you can get both great results and great relationships if you understand the two parts of servant leadership:

• The leadership aspect focuses on vision, direction and results—where you as a leader hope to take your people. Leaders should involve others in setting direction and determining desired results, but if people don’t know where they’re headed or what they’re meant to accomplish, the fault lies with the leader.
• The servant aspect focuses on working side by side in relationships with your people. Once the vision and direction are clear, the leader’s role shifts to service—helping people accomplish the agreed-upon goals.

Making common sense common practice

This one-two punch of the aspects of servant leadership enables you to create both great results and great relationships:

1. Let your people know what they’re being asked to do by setting the vision and direction with their help. In other words, vision and direction, while the responsibility of the leader, is not a top-down process.
2. During implementation, assure your people you are there to serve, not to be served. Your responsibility is to help them accomplish their goals through training, feedback, listening and communication.

Servant leadership is the vehicle to building trust. Servant leaders act in ways that inspire trust in their followers. They are distinguished by putting the needs of their followers ahead of their own.

When team members believe their leader has their best interests at heart and is there to support them in achieving their goals, trust in their leader grows by leaps and bounds.

Trust is an outcome. If we act in trustworthy ways, we build trust. If we behave in an untrustworthy manner, we erode trust. It’s common sense—but not always common practice.

Simple Truth: Leadership begins with trust

Some leaders charge headlong into setting strategies and goals for their teams without giving much thought to building trust. Yet trust is the foundation of any successful, healthy relationship. When you have the trust of your team, all things are possible. 

Creativity, innovation, productivity, efficiency and morale flourish. If your team doesn’t trust you, you get resistance, disengagement, apathy and, ultimately, failure.

The most successful leaders realize their No. 1 priority is to build trust with their team. Trustworthy leaders demonstrate competence in their roles, act with integrity, show care and concern for team members, and honor their commitments by following through on their promises.

Making common sense common practice 

Does your team perceive you as trustworthy? If you’re not sure, ask them. Here are a few sample questions:

• Do you have confidence in my leadership/management abilities? Where or how can I improve?
• Do I walk my talk? Where can I be more consistent in my behavior?
• How well do I listen to you? Do our interactions leave you feeling heard, valued and supported?
• Am I dependable? Do you trust that I’ll follow through on my commitments?

Demonstrating your vulnerability by having a discussion with your people about trust is a powerful way to introduce servant leadership in your workplace.

Leadership is complex, but we don’t need to make it complicated. Following simple truths of leadership is the way to turn common sense into common practice. Keep it simple!

Ken Blanchard is one of the world’s most influential leadership experts. He is co-author of more than 65 books, including the iconic “The One Minute Manager,” with combined sales of over 23 million copies in forty-seven languages.

Randy Conley is vice president of global professional services and Trust Practice Leader for The Ken Blanchard Cos. He is co-author of Blanchard’s Building Trust training program and works globally to help organizations build trust. 

Reprinted with permission by SmartBrief.

Whether your construction contract is one page or 40 pages, a single word can affect your chances of winning in court. Attorney Michael Cortez, of Andrews Myers PC (Houston, TX), explained the nuances of construction contracts and how credit professionals should address language that may be unfavorable to them, during the Credit Congress session, How to Interpret Construction Contracts. Cortez stressed the importance of looking at more than just payment terms and how “buzz words” can impact dispute resolutions. 

Contract language can be interpreted differently by the parties to the contract as well as the court system so it’s important to pay attention to key words, or buzz words, found in legal statutes or case law because they help clarify meaning. The inclusion or omission of a key word could make the difference in interpretation and who prevails in a dispute. For example, in the phrases “pay when paid” versus “pay if paid” the words “if” and “when” determine whether the risk of nonpayment is on the owner or parties further down the contractual chain.

Among the many important factors concerning construction contracts, time and money are the most important—specifically, finishing the job on time and within your budget, Cortez said. Understanding the laws of the state where you are doing business also matters because state statues vary and can impact indemnity issues that may occur during the project.

According to Cortez, the key is maintaining leverage. However, credit professionals should remain prepared for risks, and contracts must address those risks adequately and fairly, he continued. “The party that is prepared to deal with these risks early and successfully are likely going to receive the least amount of impact, and it’s going to save them time and money.”

If you do not understand the risks you are undertaking, do not sign the contract until you have had time to consult an attorney, Cortez said. If the other party refuses to accept any risks, try to minimize the impact as much as possible.

Cortez also offers one simple, yet major piece of advice for interpreting construction contracts: read them. If not, companies may expose themselves to potential “landmines” hidden within the contractual language. “[Incorporated by reference clauses] are one of the most overlooked issues,” Cortez said. Incorporated by reference clauses are dangerous because they refer to another document while tying you into the terms and conditions of that document regardless of whether you reviewed it or not. For example, an incorporated by reference clause may tie in the supplier to the agreed upon contract between the subcontractor and general contractor.

Additionally, liability considerations and a clearly defined scope of work can play a large role in cases where both parties must turn to the original contract to determine who is responsible for certain damages, work procedures and more.

The key liability considerations Cortez advises credit professionals to address are:

• Design defects
• Concealed conditions
• Schedule delays
• Liquidated damages
• Insurance/Indemnity
• Payment term changes

This is especially important when considering who is liable for damages or loss during the project and for indemnification clauses which determine who pays in cases where damages or loss occur. “It depends on what the original contract says,” Cortez said. “Specific language overrules general language regarding clauses, so the more specific the better.”