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Understanding commercial innovation


‘Commercial innovation’ is increasingly recognized as a critical discipline for business survival and the delivery of value. Back in the 1940s, Nobel prize-winning economist Joseph Schumpeter made the observation that to achieve success, technical invention must be accompanied – sometimes even led – by commercial innovation

But what exactly is it and why is it so hard? In meetings with groups who have a commercial management title, I find they are often bemused by the ‘innovation’ term in the context of their work. That’s because so many have been diverted from creativity and capability building and are instead focused on risk and compliance, mostly at a transactional level.

So what is ‘commercial innovation’?

So far as I know, there is no coherent definition of the term commercial innovation. It’s actually extremely broad. Here are some examples:

  • it may embrace the creation of an entirely new industry (for example, the insurance industry was at one time a commercial innovation; more recently a concept such as ride-sharing and the emergence of companies such as Uber are similarly commercial innovations);
  • it covers new methods of performing traditional tasks, such as the technology-enabled transformation of payment systems;
  • it includes differentiated contracting and financing models, such as the emergence of ‘as-a-service’ software, or outcome-based charging;
  • it is achieved through new methods of customer or supplier interface, delivering increased options for self-service or enhancing ease of doing business;
  • and it could be as simple as changing a single contractual term that generates positive differentiation, such as developing an alternative to liquidated damages or providing added performance guarantees.

Clearly, the scale of complexity and investment needed across these very different examples is enormous and the responsibility for identifying innovative ideas is – and will remain – diverse and unclear. Arguably, everyone within a business is responsible. So does that make ‘commercial managers’ irrelevant? Where do they fit in the innovation cycle?

The commercial management role in innovation

I see four critical activities or roles that commercial teams should be playing. These operate in part at a transactional level, but also must be applied at operational and strategic levels, supporting business goals and objectives.

Identify: a commercial manager should be a key source of identifying the need and opportunity for innovation. They will do this by observing areas that are damaging customer or supplier satisfaction. That may be through complicated payment procedures, or onerous terms and conditions, or practices that cause delay. Simple things like interfaces that lack authority to negotiate, or invoicing procedures that cause high rejection rates are examples that any good commercial function should be on top of.

Research: seeing opportuniteis for internal improvement is not in itself going to generate competitive advantage. High performing commercial teams undertake regular market research, not just of competitors, but also in understanding the needs and pressures on their customers or suppliers. They look at other industries for ideas. They commission research studies so that their ideas are backed by facts. It is not hard to do. A professional association like IACCM provides many channels for gathering research data or forming research networks.

Evaluate: a key attribute of any commercial manager should be their ability to evaluate change and innovation proposals. What is the implication? Who is affected? What is the strength of the business case? Are there better ways of achieving the same goal? Thorough analysis is needed to assess impact and ensure there is overall understanding of implications.

Implement: finally, any commercial innovation needs to be implemented. It will have impact on a range of business capabilities and may need to be reconciled with other offerings or practices. Often there will be a need for new contracts or terms and potentially impact on business systems or skills. Without strong sommercial support, the innovation is likely to fail or under-deliver.

The truth about invoicing


There is compelling data from a number of sources indicating the scale of invoicing error in business. In some cases, organizations are over-paying their suppliers by 5-7% – an amount that, if corrected, would transform their financial performance. 

There’s also another aspect of error and that is the cost associated with the extent and frequency of invoice rejection. As organizations introduce new systems, such as robotic process automation (RPA), they are starting to track the number of invoices that are wrong, not just in terms of the amount billed, but because of factors such as incomplete and missing information, incorrect coding or simply the wrong address. This too represents a cost which, for a large organization, can run into millions of dollars.

We have a problem

But there is a problem with much of the data on this topic and that’s because too much is written from a procurement perspective, implying the fault always lies with the supplier and that increased accuracy would therefore somehow translate to yet more ‘procurement savings’.

Why is that a problem? Well, for several reasons. Let’s start by looking at two factors that challenge the issue of overpayment. 

1. Overpayment

First, except in the public sector, buyers are also providers of goods and services. So unless they are absolutely lily white in their own sales invoicing, an increase in accuracy will often mean those ‘savings’ are likely to be matched by a corresponding reduction in the revenue they receive. This obviously isn’t a bad thing, but it’s important to recognize that there are two sides to this equation.

And second, there tends to be an assumption that invoicing error is always one way, always benefitting the supplier. Certainly there are examples of padding, even of gross and deliberate over-billing, and I have little doubt this sometimes occurs, especially in fields such as professional services where accurate tracking has traditionally been hard to achieve. Yet I know of many instances where suppliers undercharge. In fact, especially in more complex projects or services, IACCM data suggests a similar level of 5 – 7%, often because business units have no incentive to charge for ‘extras’ or to challenge additions to scope. They tend instead to put such items down to ‘good will’. So this too points to the fact that greater rigor in invoice accuracy will lead to a probable reduction, if not elimination, in the amount of any savings.

2. The cost or errors

Moving on to the question of broader errors and invoice rejection, this again is often positioned as though the supplier is the culprit. Yet in reality, suppliers are of course victims. They have no interest in spending time reworking invoices or suffering from payment delays. Much of the evidence points back towards a high degree of customer incompetence or actions that deliberately generate ‘errors’, presumably to extend payment periods. For example, slow and bureaucratic contract and purchase order processes frequently mean suppliers are pressured to start work early, with assurances from the customer ‘just send an invoice and you’ll get paid’.  When it comes to deliberate action (or inaction), invoicing procedures are often vague or ill-defined, including things like address data or submission methods missing. It isn’t uncommon for the ‘error’ to actually be internal, with accounts payable rejecting payment because of mistakes within the purchasing business unit.

So what’s the real problem …. and outcome?

Overall, it’s fair to say that invoicing remains an untidy and costly activity. Streamlining, especially through shared billing systems perhaps powered by smart contracts, ought to save a lot of time and generate substantial reductions in operating costs. For many businesses, it will also have a net positive impact on cash flow. But if I had to guess the eventual balance when it comes to reduced spend versus increased revenue, I’d have to say the likelihood is that it will prove close to neutral. 

Self-service contracts: a revolution waiting to happen


Today, I’m feeling surprised. And a little disappointed. I thought that progress was happening at a greater pace than it is. The fact it is not is bad news for the commercial community and its ability to innovate.

Self-service contracts and the law department

I spent much of yesterday reviewing the input to an IACCM survey on self-service contracts. This study focused particularly on the frequency of legal review and approval when there is any form of amendment to the approved standard. And the answer is that, on average, a staggering 85% of such agreements are subject to legal review. Of course, that implies that there even is an approved standard. Some 17% of those responding are still working to develop or expand their stock of templates.

We know it’s a problem

The one encouraging finding from this research is that a majority recognize their current approach is a problem and needs to change. But in general, the approach to change is remarkably limited and fails to tackle the real issues of increased speed, agility and market-appropriate terms and conditions. Only a very small percentage – perhaps around 5% – have grasped the point that many of the risks they perceive are illusory, that their legal department is innately conservative and that real change depends on new thinking.

For example, rather than fret over when and when not to undertake legal review, why not seek to eliminate or minimize the question?

Templates are a good example of the problem. Yes, they have historically helped to reduce the volume of legal reviews. But by nature templates are rigid, constraining and constantly out of date. The future is about clause libraries that support self-service contract creation and that are dynamic in nature due to constant market feedback.

Training is another example, with some 20% of respondents planning investments in this area. Perhaps it will help, but in most cases it seems that the training is traditional and generic in its form, rather than delivered through on-demand modules that tackle specific topics or issues. And there is very little evidence of training that seeks to reduce or avoid the need for amendments, even though separate research suggests that a high volume of negotiation occurs due to the fact that Procurement and Sales lack sufficient understanding of the offering.

Is there an answer?

Some 12% of organizations stand out for their relative success in reducing legal review. They benefit from faster closure rates and no evidence of increased risk exposure. Their approaches vary and some are without question more sustainable than others.

Those at the top of the heap are deploying technology, but not simply as a way to automate today’s processes. They are working to embed contracting competence across the business, developing systems to ensure easy access to market-appropriate terms, user-based contract design, on-demand knowledge and instructions embedded on mobile devices …. These groups undertake regular market and competitive research, having grasped the point that contracting is a major source of value -add and key to ease of doing business. For them, self-service is becoming the norm.

IACCM’s report on self-service contracting will be issued to its 55,000 members this week and will be available on the association’s web site at http://www.iaccm.com

Beware the analysts peddling Contract Management software


Contracts are critical to business and society, yet it is a field that continues to be under-served and in many ways damaged by misunderstanding and ignorance. Among the most ignorant are many of the analysts who opine on contract management technology. Most have consistently misrepresented the nature of the market and their influence has frustrated the business improvements that should by now be common-place.

A recent report – which can apparently be acquired for a mere $2,000 – comes from Research & Markets (apparently ‘the world’s largest market research store’) and forecasts annual growth rates of 14% for Contract Management software, generating a $2.4bn market by 2024. I must confess that I have not forked out the money to buy this particular report. However, a quick review of its description suggests that the authors (who seem to be anonymous) have limited understanding of what they are talking about. Their list of ‘key players’ omits market leaders in this field. They seem to suggest that the primary purpose for CLM software is that it ‘helps lawyers in retrieving similar contracts from the library for reference purposes’ and, as coincident benefits, can raise efficiency and oversee compliance. Where confusion is especially evident is in the statement ‘the emergence of cloud-based CLM software …. provides seamless integration with popular CLM systems’. 

An on-going problem

If this were a one-off, I would ignore it. But for almost 20 years now, practitioners have been struggling with the ignorance of most analyst firms in this important field. For much of that time, advisory activity focused almost exclusively on procurement, as if this was the only area where contracts exist, and struggled to see (or represent) contracting as anything more than an administrative task supporting commodity acquisition. This failure in understanding drove the development and acquisition of products that simply failed to meet business needs.  It meant that commercial staff regularly found themselves battling with their colleagues in IT, who had been seduced by recommended solutions contained in the latest analyst report.

And it doesn’t end there

Adding to this past confusion, we now have the trend of referring to contract management software as ‘legaltech’ – which it patently is not. Contract management software is – like contracts themselves – a key business asset which can provide a remarkable return on investment – but only when the process of contracting is actually understood. It is a multi- functional activity. The average contract contains very little legally-determined content and, to illustrate this, contracts drive and determine operational activity throughout the business.

Contracting as a core discipline

Viewing contract management as essentially an administrative task is rather like suggesting that science is all about laboratory technicians. The fact that some elements or forms of contract can be standardized doesn’t mean that low-level automation within a source-to-pay system or an ERP bolt-on has suddenly ‘fixed’ the contracting process. Nor does the existence of a contract repository accessible by lawyers suddenly revolutionize business performance.

With today’s technology, we at last have a chance to develop an integrated lifecycle process that embraces the multiple stakeholders and allows data flows both within and between enterprises. It can also drive greater and more intelligent standardization and support informed, fact-based decision making, rather than relying on individual beliefs or preferences.

For those who prefer to continue in the dark ages of traditional contracting, I’m sure you’ll find plenty of analysts ready to take your money. For those who really wish to drive business simplification and value, make sure you seek advice from someone who really understands what contracting means.

Legal Spend: Have Law Departments Got It Right?


The 2018 HBR Consulting report on in-house legal spend contains interesting data. It reveals a continuing, if modest, increase in budget and a tendency towards increased headcount. Of the various efforts to increase efficiency, the adoption or use of technology appears the most prevalent. Meantime, the hourly rates of outside counsel apparently continue to increase.

Efficiency or effectiveness?

What I find most interesting about the data is the apparent acceptance that sustained workload increase is inevitable and that the response to this must focus on efficiency. And even this acceptance of the need for greater efficiency is not supported by evidence of any great sense of urgency. Although 49% of survey respondents say they have a spend analytics solution in place, there is no evidence from the data that in-house groups are considering ways to reduce workload.

Is trust the issue?

Most business functions are under sustained pressure to reduce costs. They do this in a variety of ways that include technology adoption, outsourcing and use of lower cost resources. Legal groups recognize each of these methods, but in reality their use remains limited. However, another favored technique is workload elimination – and mention of this is completely absent from the HBR report. It’s almost as if in-house groups are saying “workload increases are inevitable; we can’t work differently and we can’t trust others to do the work for us”.

In reality, a significant proportion of legal work is repetitive. Because of the way lawyers work, they create differences – for example in the use of words or structure of forms. It is also easy to exaggerate the scale of difference – for example between jurisdictions or within individual situations – that then requires individual review or judgment. A refusal to delegate, to introduce playbooks, to focus on standardization often appears more driven by self-interest than business interest.

The data is not encouraging

IACCM is currently conducting a survey that explores the use of self-service contracting. This is one method that is often discussed as a way to reduce legal workload. The study seems likely to reveal that ‘discussion’ is about as far as it goes. Meaningful efforts to tackle legal workload – and the consequent bottle-neck that is created – are not immediately evident. Will the growth of Legal Operations teams – especially those which are populated by non-lawyers – change the dynamic and at last lead to truly new thinking and methods?

5 Steps to Build Commercial Expertise


There’s a lot of conversation about building commercial competence within organizations. Sometimes it is referred to as ‘business acumen’. The reason it is so important is that decisions need to be made faster, but they must take account of risks. So there is growing investment in programs that help the workforce operate with better judgment.

However, while these programs for overall competence are of great value and importance, they don’t replace the need for true commercial experts. Ultimately, you may be able to help the workforce better identify risks and thereby avoid dumb decisions – but where are the people to whom those tough situations can be handed for resolution?

Right now, many organizations are struggling to develop those experts. So what should they be doing?

  1. Appoint the right leadership. Surveys by the International Association for Contract & Commercial Management have consistently shown a tendency for functional leaders to be drawn from the ranks of high-performing practitioners. These ‘hands=on’ individuals are often not natural leaders. They may be great problem-solvers, but don’t invest time in people development, knowledge transfer or strategic thinking. This is inhibiting the progress and relevance of many commercial teams, whether in contract management, procurement or legal. Managers today need to be selected for their ability to develop their people and ensure the value of their contribution to business goals.
  2. Coping with change. Change feels endless and people become wearied by it – unless it can be transformed into an area of excitement. A good commercial expert must be an enthusiast for change, yet many today are more focused and oriented on compliance – the opposite end of the spectrum. Commercial expertise depends on shifting thinking and behavior, to recognize that ‘compliance’ is a baseline and that commercial work is to constantly test that baseline and move it forward, such that business capabilities are aligned with business and market needs. Commercial teams must embrace disruption, not resist it.
  3. Digital enablement. Commercial groups are typically either lacking in technology, or lacking in the right technology. That’s in part because of the challenge of finding systems that can deal with volatility and in part because of the traditional view that ‘commercial judgment’ is an individual capability born out of personal experience. Digital tools can be transformational in commercial decision-making. They can empower the workforce with commercial awareness and they can equip the experts with powerful data and analytics that moves a commercial function to the very heart of the business. Developing a digital strategy is fundamental to coping with the present and preparing for the future.
  4. Motivating performance. Commercial staff must be objective. Their judgment should not be clouded by motivation or reward systems that distort behavior. Focus on measurements that look at the quality of decisions over time. Introduce mentoring programs that assist personal growth and team activities that result in sharing of experience and knowledge. Develop people who gain satisfaction from the enthusiasm of the business to engage their services and seek their advice.
  5. Competency appraisals. High-performance commercial teams are key to maintaining competitiveness and promoting innovation. Too often, they lose sight of key business goals and strategies or lack critical external knowledge and benchmarks. Undertake regular competency assessments that evaluate commercial capabilities and provide benchmarks against market norms and standards.

As a not-for-profit association, IACCM undertakes extensive research and benchmarks, equipping it to help member companies build and test commercial expertise. For example, corporate members qualify for an annual commercial capability assessment at no charge, offering the sort of insights and market comparisons that drive continuous improvement.

For more information about IACCM services, visit www.iaccm.com or contact info@iaccm.com

Reality trumps ambition in contracting


In recent years, the UK Government has shown tremendous ambition in its efforts to transform the delivery of public services. Today, it offers a salutary tale illustrating the importance of ensuring that vision is tempered by an understanding of reality.

Last week saw the collapse of another private sector outsourcing provider, this time overseeing the delivery of probation services within the criminal justice system. Quite simply, the outcome-based contracting model that has been used is failing and providers are running out of money.

Is the model at fault?

Outcome-based contracting is not a new concept, but it is in most cases a far more complicated model than most alternatives. There are several reasons for that. One is that organizations often struggle to define precisely what outcome they actually want, or find that when it is achieved, they really wanted something different.

A second factor is change management. Shifting needs, new capabilities, innovative methods frequently create the need for dynamic change capabilities. This can be complicated to embed in the contract and it also requires a readiness on the part of all stakeholders to engage in change discussions, which may require quite fundamental renegotiation of the contract – even potentially its termination.

The third major factor is whether the contracting parties actually have the capabilities to oversee and manage an outcome-based contract. One example of capability is the necessary cash reserves or access to funding implicit in potential delays in payment (achieving outcomes often takes time). Another example is whether there are reliable monitoring or measurement systems to generate timely, accurate and mutually agreed data about the results achieved. Just as important, are there real-time data flows to assist monitoring and provide early warning of problems? And then there is the question of skills and competencies – an outcome-based agreement demands very different levels of governance and performance management than traditional forms of acquisition.

Finally, there is the question of culture. To what extent are the customer and the suppliers compatible in their outlook and behavior? Outcome delivery typically requires a greater level of collaboration, a readiness to share information and work on joint problem solving.

So what was missing?

There are sure to be further enquiries into the probabtion contract failure and it is important to point out that this is merely one example of the problems many organizations have with more complex forms of contracting.

In this instance, it appears that the required outcomes were quite well defined. The major failings look to be more associated with the belief – or perhaps hope – that the client did not need to maintain active engagement. Based on media stories, it seems that warning signs were not being actively monitored and, when they became evident, were ignored. A lack of readiness to accept accountability, to recognize a role in managing risk, is a frequently observed cultural characteristic in the public sector. And ultimately, it seems likely that this was a case where politically-inspired decisions focused on saving money took precedence over thorough analysis or good judgment.