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Contract Management & Financial Awareness

August 26, 2009

The recent, very active discussions on this blog about the role and value of contract management have highlighted growing consensus on the need for improved financial skills and knowledge.

One of the distinctions that I observe between Contract Managers and Commercial Managers is that the latter often play a much more significant role in financial modelling and oversight of cost or revenue performance and risk. This is obviously a powerful source of functional value and acts as a counter-balance to the narrower role of managing only legal risk. The current credit crisis – and broader market volatility – has rendered the need for strong financial skills and awareness even more important.

It is not always obvious where the contracts professional can look for broad financial updates. One source that I find useful is gtnews. While many articles are very focused on detailed corporate finance or treasury issue, there is a good mix on wider market updates and trends. Last week, for example, there was a series on the Financial Supply Chain and the challenges being created by current credit conditions (pretty important stuff for anyone establishing trading relationships).

 I was able to learn about the emergence of pre-paid cards and the development of industry standards in Europe. This is expected to reduce fraud and simplify a wide range of consumer or small business cross-border transactions.  This issue of standards (or the lack of them) is apparently a major inhibitor to supply chain efficiencies in Asia Pacific, where trends to e-invoicing are limited by the lack of common platforms within the banking and commercial sector. So contract negotiatores need to be aware that deals involving trade within Asia Pacific may face limitiations in their use of e-commerce.

The article on e-invoices highlighted a number of further trends and opportunities in Asia. One interesting fact was a trend back to the use of Letters of Credit in trade finance. Open account, in which the importer pays after receipt of invoice, is currently the norm for some 80% of international trade business. But credit concerns have led to a re-think and the push for more security that LCs in theory provide. However, teh article warns that credit shortages have resulted in many banks becoming far more bureaucratic in their management of letters of credit and using the smallest excuse to delay release of funds. Again, important information for the contract manager.

The credit crunch is also apparently leading to a spate of mergers and acquisitions in the banking sector in Asia, leading some to suggest that international trade is best entrusted to the large international banks, with a consequent shift away from smaller, less technologically enabled local banks.

Finally, I turn t0 an article on Eastern Europe, which reveals the continuing challenges faced by the region as a result of  the global economic crisis.  Western European banks continue to tighten credit lines and in some cases withdraw from the region; sovereign credit-worthiness is still declining; and commodu=ity price drops have had substantial impact. The report identifies two distinctive segments, one being countries that are within the EU and part of the Euro-zone, the other being those countries outside the Euro-zone and are far more exposed. “In the current climate, a company’s corporate governance, which includes the trust and integrity of the management and owners, has become much more important”, according to the article – again, a consideration for the contract manager in assessing risk and seeking relevant disclosures.

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