Tesco, a major retailer, becomes the latest in a growing line of private sector companies that appear unable to properly manage their contracts. In this case, there is a black hole of more than $400m from over-stated revenues, apparently stemming from commercial agreements with suppliers. Essentially, I presume, Tesco has counted forward revenue (rebates) and applied it in the wrong accounting period, in order to boost results.
The Chairman dismisses the incident with the words ‘Things are always unnoticed until they are noticed” – an obvious truism, but scarcely an effective response. Today, regulatory authorities, shareholders and society rightly expect more. In this era of automation and ‘big data’, top management should have better insights to what is going on, especially in the performance of contracts.
And it is in the area of contracts and external trading relationships that most of these commercial issues seem to occur. Whether it was the financial crisis, the repetitive issues over bribery and corruption, the scandals of overcharging or the inability to properly count revenue, weaknesses in overall contract oversight are a common theme.
No wonder, then, when we talk about the growing need for commercial competence, we see a direct link to the quality of contract management – both within individual deals and across the contract portfolio. But executive action in addressing weaknesses in contract management are woefully slow. Levels of automation lag well behind other functions. The role is still seen largely as administrative, rather than analytical. And until this changes, situations like that at Tesco are bound to be repeated.