TRANSCRIPT

COMMERCIAL AWARENESS FOR BETTER BUSINESS OUTCOMES

SECTION 1: COMMERCIAL AWARENESS IN THE CONTRACTING LIFECYCLE

MODULE: THE CONTRACTING LIFECYCLE

The Contracting Lifecycle

Just because most organizations don’t have a well-defined commercial or contracting process
doesn’t mean that such a process doesn’t exist. It simply means that it is often very confused and
potentially quite ineffective.

Why is this? Frequently, contract and commercial activities are sub-elements in other processes -
- for example, in Product Lifecycle Management, Procurement or Project Management. This leads
to a lack of cohesion and poor data flow across multiple groups and systems. Ultimately, it means
that, in many organizations, no one has a complete overview of who is responsible for providing
commercial guidance, making decisions or producing a complete contract. As a result, there are
occasions when the resulting contract is not fit for purpose, and where responsibility for contract
performance is unclear, or where the authority to agree changes is confused.

This matters because there are many people in some way involved or impacted by the commercial
and contracting lifecycle, often without realizing it. And that is what creates the danger of unwise
conversations, commitments and expectations. The purpose of this course is to move participants
to a new level of awareness - to assist in a shift from ‘I don’t know that I don’t know’ to a position
of ‘I know that I don’t know’.

So, as a foundation, let’s first look at the tasks and activities associated with the contracting
process, separating them into the elements that generate the strategic and operational framework
and those that are undertaken at the transactional level, supporting individual business needs and
contracts. Please review the attached handout, and maybe even print it out for convenient
reference throughout the rest of the course and beyond.

How Contracts Reflect Commercial Judgment

Contracting is the process through which requirements and commitments are evaluated and
established. That includes decisions over the form and type of contract that is needed - or indeed,
whether a formal contract is needed at all. It is essentially a process of questioning - what is it that
is needed, what benefits can be achieved, what risks does it entail, how best will a successful
outcome be achieved? Contracts and the contracting lifecycle are the bedrock of informed
commercial judgment in practice. Contracts are not just legal documents that bind the company
– taken together, they reflect a company’s commercial judgment and underpin its financial

© IACCM 2020
performance. IACCM research demonstrates that 98% of people agree that winning and awarding
contracts is important to the health and welfare of their business – so clearly they see contracts
as innately important.

Contracts – and the many relationships integral to those contracts – provide a vehicle for putting
sound commercial judgment into action. But all too often they are not seen this way. In general,
contracts are usually pretty good at staying in line with the law but they're not necessarily good at
staying in line with broader commercial business strategy. Contracts are assets whose value
during their lifecycle must be maximized.

The true ROI of contracts and contract management does not lie in the risks the contract and the
process avoid; it comes from the value it can add through continuous update, adaptation and
streamlining of the way that businesses interact. It is an instrument of creativity, based on
performance data and the ability to exercise good commercial judgment. This is a big step away
from things like administrative coordination, oversight of obligations and compliance – and it
reflects the business intelligence needed to prosper in the digital age.

Volume Discounting Example

Here’s a real-life example of how contracts can reflect a lack of commercial awareness and thus a
loss of value: a company was concerned that they were losing market share with a lot of customers
– they believed that the reason why was because their products and services were becoming
commodity-priced. And they decided that they needed put extra value around them and needed
to start providing incremental commitment to excellence around performance. However, the
people involved with creating the contracts thought all of this really risky so the only offering that
they actually put out into the market was volume discounting.

Well, there’s no faster way to show commoditization product or service then do go down the
volume discounting route! This is just one of the many breakages that can occur in a commercial
lifecycle where particular functions undermine the commercial strategies from senior
management. And obviously that then manifested itself and became evident into the market
through the contract.

The contract is a critical instrument in fulfilling and supporting the commercial promise and
commercial policy in practice. In the volume pricing example, the senior executives were selling
solutions; but at a practical level in the contract they were selling commodities. The contract
memorializes the reality of the business transaction.

Contracts as a Feedback Mechanism

We have explained how contracts are connected and influenced by commercial policies and
practices, but the link does not end there. In high performing organizations, the contracting
process and individual agreements represent a feedback loop that ensures those commercial
policies and practices remain current and competitive. For example, if every customer or supplier

2
challenges your payment terms, it indicates it would be smart to investigate. Perhaps you are out
of step with the market. Or maybe analysis of contract performance shows that a high percentage
of your agreements are impacted by disagreements on scope or service levels. In that case, it may
be that you need to revisit the process by which such things are defined, or better train those who
are responsible for their drafting.

The key point here is that a very high proportion of an organization’s staff are in some way involved
with contract creation or performance, yet often do not think of their work in this way. In many
cases, they simply see ‘fixing problems’ as part of their job, their value. As a result, information
that is critical to the longer-term health and efficiency of the business is lost. Are you one of those
people? Do you have experiences or information to share? Are you, in that sense, a source of
commercial awareness?