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Are your contracts undermining your business model?

May 1, 2018

Business models must be adaptive and often need to change fast. Business models dictate required operational capabilities, commercial policies and practices and market relationships. All of these elements combine to determine the types of contractual relationships and terms that will be needed to support organizational goals and strategies.

There are multiple alternatives for a business model. For example, it might be based on the typical ‘razor and blades’ approach where something is given almost free in order to attract future high-margin sales; or it could be a low-cost model, where power is exerted over a supply chain to compete on price; a bricks and mortar model, as opposed to an on-line platform; a product and services model, as opposed to a lease or ‘as a service’ approach. The list goes on – and of course each of them has an impact on market relationships and the consequent approach to contract terms.

The business challenge

On the surface, it doesn’t sound like it should be especially difficult to shift from one model to another. Of course some are more complicated than others – for example, shifting from a bricks and mortar approach to an on-line presence has proven challenging for many. But doing something like changing terms and conditions is, after all, just a paper exercise.

In reality, it is much harder than that. Contracts are in part a promise to the market, but they are also a protection form the market. They are in many ways ‘where the rubber meets the road’ – what can I confidently commit without taking an unacceptable risk (or put another way, without lying or breaking my word)? And that is where the problem arises, because a shift in business model also requires a shift in capabilities – and often it turns out that intent has outrun reality.

But the problem is bigger than that. Contracts and legal groups frequently don’t have experience in tthe new model and may not know what form the new contracts should take. They also face the question of what to do with existing contracts and relationships, how to manage a transition. Often they encounter internal barriers from groups that either don’t understand or don’t want to make the change.

It’s all about agile

As mentioned in the introduction, market and competitive pressures are causing shifts in business model much more frequently than in the past. Traditionally, contracts and leagl groups tended to wait to be told what to do. That’s no longer good enough. Indeed, high value groups increasingly act as market obervors, proactively monitoring competitive terms and conditions so that they spot the shifts in offerings and identify sources of competitive advantage. Such groups remain in the minority; IACCM capability assessmetns frequently reveal the extent to which contracting practices and terms lag behind corporate goals and strategies. That is not a good thing; contracts and commercial teams need to become the eyes, ears and voice of the business when it comes to commercial policies.

 

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