RIsk, Revenue and the Role of Contracts
Winning contracts is key to almost every businesses outside the retail sector, since without them there would be no revenue. For most CEOs. sustained revenue growth is important to their performance measurements and personal job security. Therefore it is not surprising that considerable interest is shown in successfully closing revenue contracts and rather less in the case of procurement.
In general, executives look to Legal and Contract Management groups to be aware of contract risk and to assist in its containment. But given that the ultimate risk is failure to win contracts, they value people who bring solutions, not problems. That is why, in most cases, we generate a more receptive audience if we are talking about revenue enhancement through elimination of risks, rather than warning of the dangers of doing business. It is what makes IACCM’s work on risk probability and its potential bottom-line contribution so compelling.
It is clear that support organizations such as Legal, Procurement or Contract Management need to focus on the executive agenda if they want to be seen as strategically relevant. So in general this means we need to be better at promoting our value in terms of contribution to revenue and profit growth. But that is not always the case. Periodically, there are companies – or indeed entire industries – where broader risk issues become dominant. Examples were the telecoms sector in the e3arly 2000’s and more recently financial services and banking. In these cases, an entire industry went into almost unconstrained pursuit of growth. Caution was thrown to the winds. In their frenzy to maintain market share, companies were bidding for business on almost any terms. Contract management groups – if they existed – were pushed aside or integrated into Sales, in order to accelerate deals.
The consequences took some time to emerge, but when they did, they were catastrophic. Many businesses – for example, in the telecoms sector, Nortel and Marconi – went out of business. Others were forced into rapid mergers or acquisitions – AT&T, Lucent, KPN etc. The pattern in banking is very similar. And for these industries, the result has been a dramatic shift in the executive agenda and their perception of the role and value of contract management discipline. As the CPO of one large bank told me last week: “All I have to do is mention the words ‘regulatory risk’ and I am instantly on the CEO agenda”.