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Winning contracts with distinctive capabilities

April 11, 2016

Economist John Kay has highlighted the importance of ‘distinctive capabilities’ in establishing competitive advantage. The correlation to contracting and commercial terms is immediately evident – not least because he sees these capabilities being delivered in the context of external relationships.

“Distinctive capabilities are a relevant factor of an organization’s resources. Companies with distinctive capabilities have attributes, which others don’t have and cannot replicate. There are three distinctive capabilities which a company can possess to achieve competitive advantage through relationships:

  • Architecture: It is a structure of relational contacts within or around the organization with customers, suppliers and with employees
  • Reputation: This includes customer’s own experience, quality signals, guarantee, word of mouth spreading, warranty, association with other brands and staking the reputation, once it is established
  • Innovation: Provided that the innovation is translated to competitive advantage successfully.”

There is, of course, a counter-side to this position – which is that contracts and the contracting process can distinguish an organization for its negative capabilities. In other words, if contract terms and approaches to negotiation are risk averse and seeking to limit commitment, they damage architecture, reputation and innovation.

So distinctive capabilities are created through contracting and commercial skills – but require a real shift in attitudes to risk.

Increasingly, the winners in the marketplace are those who consciously endeavor to meet – rather than resist – market aspirations. Often that means a need to consider how to embrace levels of risk that were previously unthinkable. For example, in industries such as telecoms or oil and gas, clients are demanding ever more onerous terms from their suppliers. Rather than resist, there will be some who start to ‘think the opposite’ – in other words, how can we accept these risks? The answer will often be to take on greater responsibility and control, to reduce the extent of dependency on the customer’s capabilities or actions.

This was the revolution that happened to much of the IT industry, when it moved from supplying products to undertaking long-term outsourced services. Initially reluctant to accept increased liabilities, the industry has steadily realized that many perceived risks are actually a phantom and that many others can be effectively controlled through appropriate forms of governance. The best suppliers have focused on improving their capabilities – including their contract management skills – so that they can offer distinctive commitments.

This thinking is just one more illustration of why contracting and commercial skills have become so important – and why, as practitioners, our attitudes must shift from a focus on protection and avoidance to instead being a force for creativity and enabling.

 

 

 

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