Many of our clients are seeking to become more “commercial” and market their services and expertise to generate increased revenue and margins. There is the general misconception that once the customer has signed the agreement there is an expectation that somehow the contract will manage itself. This is rarely the case and fails to recognise that professional commercial management can also bring about significant savings and margin improvements, re-buy and upselling opportunities. For the purposes of this article, I am referring to all those who might be involved in a commercial role e.g. asset managers, account managers, customer managers, relationship managers etc as “commercial managers”
In many organisations commercial agreements are not well managed or administered and as consultants we often come across examples of poor commercial management. In the first instance, we look for the symptoms of poor practice, the underlying causes can then be better analysed, and remedies applied. The symptoms or the observable outcomes can include the following:
- Poor or inappropriate scope of work, leading to need for variations disputes with the customer
- Cost and time over runs, as the scope of work is expanded by the customer due to poor up-front definition of requirements
- Instructions not provided by the customer in writing, leading to disputes over costs and works undertaken
- Conflicts and disputes with stakeholders and customers over scope and costs
- Lack of compliance by the customer with their own internal requirements
- Critical Success Factors not identified by the customer
- HSE issues are not fully appreciated by the customer and the impact upon time and costs
- Excessive use of variations to cover poor customer scopes
- Valid claims rejected by the customer
These are common expressions of a lack of a robust and fit for purpose process combined with less experience and/or unsupported people. The specific causes of poor performance can include a poor commercial manager selection process, lack of key stakeholder involvement, poor commercial execution and focus on prices charged and not total life cycle cost of service delivery.
I would define Commercial Management as the “Cross functional process that supports the sales team in securing sustainable contracts for goods and services and the active collaboration between the technical delivery team, finance team and the customer facing commercial team to ensure optimal outcomes for both the provider and the customer”
Many experts view commercial management as a process by which the commercial manager and the team, are enabled and empowered to deliver extra value added, over and above that which has been specified originally and assessable against criteria in the original agreement. This extra added value can include process innovation, cost reduction and service improvement. The emphasis is this definition is on the commercial manager as an asset and business partner.
The consultants Booz Allen Hamilton and PwC define Commercial Management as a way for organizations to “grow their top and bottom lines by imposing discipline on a company’s pricing decisions and aligning its service offerings with customers’ needs”
The WorldCC (formally IACCM) defines commercial management as “the discipline that both informs and implements business strategy and policies. It informs in the context of testing and aligning market requirement with organizational capability. It implements through ensuring effective and efficient operational procedures that establish and maintain those capabilities”
McKinsey state that “those organisations with superior commercial capabilities consistently deliver higher revenue and earnings growth than peers in the same sector” these commercial capabilities include:
- Transforming data into intelligence
- Develops a culture that empowers people to do things in new ways
- Implements a structure to enable the sharing of intelligence throughout the organization
- Actively “engaging” with customers, contractors, and stakeholders
There are many commercial managers that are unable to put these into practice. Commercial success depends on coordination across ‘the system’. It is about cooperating, controlling, and maintaining alignment precisely the role that an effective commercial manager plays in formulating, negotiating, and managing a sales agreement. A recent report found that “at key phases of the contracting lifecycle, different groups or functions may take the lead. This is a major factor in driving complexity and potential inefficiency into the contracting process, resulting in additional costs, delays and potentially fragmented decisions.” This seems to suggest that Customers may create their own complexities and additional costs.
Ernst & Young, see commercial excellence focused on financial performance but state that “executives are increasingly having to focus on the value delivered from complex, critical customer supplier partner relationships, yet often fail to achieve commercial excellence and deliver the expected value over the full sales contractual life”
In relational contracting the focus shifts from legal terms and conditions to the party’s relationship of trust. This in turn encourages the parties to behave morally and ethically, further strengthening their relationship. Many commercial management experts feel that providers and customers must move their focus to ‘Relationship Resource Planning,’ or RRP.
Customers going out to the market with any product or service must be supported by performance commitments that are relevant to the customer and its consumers. These commitments may be specific to the product or service (for example, price, delivery, maintenance, and support) or generic to the organization (for example, brand values, ethical standards, or regulatory compliance). Commercial management is the process through which required performance commitments are gathered, assessed, and reconciled, taking account of the needs and interests of all relevant stakeholders, and ensuring their affordability and sustainability.
The role of commercial manager (or of the commercial process) is to ensure that all relevant stakeholder views have been incorporated and evaluated, to ensure that the needs (of the customer) and capabilities (of the supplier) have been aligned. Commercial managers are responsible for the financial management of projects, putting together bids for new work and negotiating and agreeing sales agreements, sometimes worth many millions of pounds. Commercial managers need to be experienced and qualified individuals. Their role is broad and includes anything from risk management to procurement, financial reporting and managing the supply chain. Commercial business decisions mostly require multi-dimensional input. It becomes challenging for the commercial manager to gather that input when it is scattered across multiple expert groups, each of which often has its own systems and data which only they can access or understand. Even when the input has been gathered, it must be reconciled. For example, how do the views of sales, legal, finance, engineering, supply chain compared with the customer’s requirements or market need generally.