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Mega-deals risk mega-loss

November 2, 2014

When GT Advanced first spotted a major opportunity to supply Apple, I am sure their management were excited by the prospect. This could surely be a route to rapid growth. When they won a contract, the market clearly agreed – the stock price rose rapidly. Now, with the declaration of bankruptcy, the post-mortem begins …

For small and mid-size companies, the allure of the big deal with a major corporation never diminishes. Yet as the story of GT Advanced and Apple shows, it is fraught with risks and danger. Pierre Mitchell has written an excellent analysis of what went wrong, pointing out that even a highly acclaimed supply management function can show poor commercial judgment in how it structures and manages relationships. The problems here appear to have been badly defined and managed scope, inappropriate contract terms and absence of effective performance management.

I must confess that I do not know much about Apple’s supply management function. I am aware that it wins awards, but I have the impression that much of Apple’s innovation has been internally driven, or based on partner relationships which are relatively standard. I wonder to what extent the Procurement organization suffers the challenge of many – that it is far better at overseeing control and compliance than in managing innovation.

But what about GT Advanced? How did their management get things so wrong? After all, they did not have to sign the contract that was offered. Surely they must have had contacts at a senior level and could have influenced the structure of the relationship and the risk terms. However, like many others, they doubtless did not want to cause delay, did not want to risk derailing the deal and probably believed in their ability to manage the situation. Such over-optimism is not uncommon; as is the failure to grasp the importance of the contracting process, especially in an environment of considerable uncertainty and innovation.

Senior management in most organizations has not ever been exposed to the importance or potential contribution of effective contract management. It just does not feature in the majority of business schools or executive training. The wider topic of ‘commercial judgment’ is not really taught much either. That is probably because teaching still operates in functional silos and there is little integration or explanation of how disciplines interact or interconnect – finance, law, marketing, project management, operations. It is these interactions that should be caught in the commercial evaluation and within the contract terms.

The GT Advanced / Apple case study will doubtless be used extensively in the next few years and hopefully will lead executives to better understand the role that contracts and contract management can perform in ensuring thorough opportunity assessment and subsequent oversight of the performance of their key relationships. Even in SMEs, where management attention may be less distracted, the value of these disciplines is enormous – and their absence can, quite literally, cost you the business.

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