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Contracts & Commercial Management In 2011

December 21, 2010

A few years ago, I wrote a definition of Commercial Management for Wikipedia. It was:

‘Commercial management is a term used to describe the non-technical business disciplines within a company or organization, particularly the administration of revenue and expenses to generate a financial return. Commercial management within an organization is applied at both policy and transactional levels. Commercial policies relate to the rules or practices that define how business will be conducted and the standard terms under which external relationships will be formed and governed. Many of these policies are reflected in the terms of any contract in which the organization engages. At a transactional level, commercial management is applied through the oversight of trading relationships to ensure their compliance with business goals or policies and to understand or manage the financial and risk implications of any variations.’

As this definition makes clear, the primary purpose of commercial management is to ensure healthy financial returns. The contract is a mechanism through which these returns are enabled and safeguarded.

There is growing evidence that the academic world has grasped this connection. But in business and the public sector, integrated commercial and contract skills remain rare. Capability is typically spread across multiple areas of the business, with no clear point of coordination or accountability for results. In those organizations where there is a dedicated contract or commercial resource, it is often focused either on overseeing broad compliance with the policies and practices mandated by others, or it manages transactional exceptions. The examples where commercial management teams are truly engaged with the strategic development of the business are relatively rare.

In a simple world of relatively consistent rules and long-term trading relationships, this absence of dedicated commercial skill would not much matter. But our world is not simple; it challenges us with speed, diversity, innovation and unpredictable events. Therefore the ability to view opportunities and relationships through the prism of a cross-functional lens has become essential. Organizations that treat contracting as an administrative sub-element of procurement, project management, legal or finance fail to grasp the risks and the opportunities presented by today’s market conditions.

There is a growing wealth of academic and business texts that reinforce not only the importance of commercial and contract competence, but also set out the framework for methodologies and techniques. As we enter 2011, the ingredients and the recipe for success are ready. What we now lack is a robust community and leadership that is prepared to promote its own cause and demonstrate to executive management its readiness to provide the cross-functional glue that represents commercial excellence.

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