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Putting a value on commercial competence

May 9, 2013

One of the most compelling presentations at the recent IACCM Europe conference was delivered by Qadir Marikar from PWC.

Qadir introduced his findings from an analysis of the IT Services and Outsourcing industry. He had started by examining the margins being achieved by the major suppliers and discovered a range that typically ran from around 2% to almost 30%. At the top end are some of the big Indian providers and their results are in large part driven by the low cost of labor (though they have also been successful in more effective use of underlying technology). However, his real focus was in understanding the difference between consistently high performers such as IBM and Accenture (each achieving around 15% margin) and the bulk of their competitors operating at 2 – 5%.

Research with clients revealed little difference in operational performance, but further analysis led to perceptions of ‘greater value’. It turned out that these are largely based on the nature and extent of ‘commercial conversations’ that occur. Qadir summarized his findings by suggesting that the low margin companies tend to respond to ‘what the customer wants’, whereas the higher margin providers ‘supply what the customer needs’.

As we examine this, there appears to be a difference in timing, allocation and purpose of commercial and contracting resource. The higher margin organizations tend to apply commercial analysis at the point of product or service development, to ensure that commercial terms and practices are aligned with the needs of target markets. As a result, they reduce the extent of deal-based negotiation and steer customers towards a robust and reliable deliverable, rather than encouraging high levels of risky customization. Second, they deploy post-award resources that ensure regular customer dialogue and performance reviews. They are focused on issues such as compliance, but tend to be more proactive in holding on-going commercial conversations around performance issues or changes in capability or requirement. By having a more reliable deliverable, they are able to operate with greater efficiency and focus on adding value rather than tackling crises. One example of this is that internal resources are much clearer about ‘the rules’ when there are clear standards and principles; organizations that are driven by individual customer requirements generate internal confusion over what can be committed.

Of course, this represents a generalized picture and not every client engagement follows these patterns. But the proportions matter and they add up to significantly higher margins.

As this case study illustrates, ‘commercialism’ is about more than contract management, but a good contracting process is a key enabler of commercialism.

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