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Understanding commercial innovation

March 19, 2019

‘Commercial innovation’ is increasingly recognized as a critical discipline for business survival and the delivery of value. Back in the 1940s, Nobel prize-winning economist Joseph Schumpeter made the observation that to achieve success, technical invention must be accompanied – sometimes even led – by commercial innovation

But what exactly is it and why is it so hard? In meetings with groups who have a commercial management title, I find they are often bemused by the ‘innovation’ term in the context of their work. That’s because so many have been diverted from creativity and capability building and are instead focused on risk and compliance, mostly at a transactional level.

So what is ‘commercial innovation’?

So far as I know, there is no coherent definition of the term commercial innovation. It’s actually extremely broad. Here are some examples:

  • it may embrace the creation of an entirely new industry (for example, the insurance industry was at one time a commercial innovation; more recently a concept such as ride-sharing and the emergence of companies such as Uber are similarly commercial innovations);
  • it covers new methods of performing traditional tasks, such as the technology-enabled transformation of payment systems;
  • it includes differentiated contracting and financing models, such as the emergence of ‘as-a-service’ software, or outcome-based charging;
  • it is achieved through new methods of customer or supplier interface, delivering increased options for self-service or enhancing ease of doing business;
  • and it could be as simple as changing a single contractual term that generates positive differentiation, such as developing an alternative to liquidated damages or providing added performance guarantees.

Clearly, the scale of complexity and investment needed across these very different examples is enormous and the responsibility for identifying innovative ideas is – and will remain – diverse and unclear. Arguably, everyone within a business is responsible. So does that make ‘commercial managers’ irrelevant? Where do they fit in the innovation cycle?

The commercial management role in innovation

I see four critical activities or roles that commercial teams should be playing. These operate in part at a transactional level, but also must be applied at operational and strategic levels, supporting business goals and objectives.

Identify: a commercial manager should be a key source of identifying the need and opportunity for innovation. They will do this by observing areas that are damaging customer or supplier satisfaction. That may be through complicated payment procedures, or onerous terms and conditions, or practices that cause delay. Simple things like interfaces that lack authority to negotiate, or invoicing procedures that cause high rejection rates are examples that any good commercial function should be on top of.

Research: seeing opportunities for internal improvement is not in itself going to generate competitive advantage. High performing commercial teams undertake regular market research, not just of competitors, but also in understanding the needs and pressures on their customers or suppliers. They look at other industries for ideas. They commission research studies so that their ideas are backed by facts. It is not hard to do. A professional association like IACCM provides many channels for gathering research data or forming research networks.

Evaluate: a key attribute of any commercial manager should be their ability to evaluate change and innovation proposals. What is the implication? Who is affected? What is the strength of the business case? Are there better ways of achieving the same goal? Thorough analysis is needed to assess impact and ensure there is overall understanding of implications.

Implement: finally, any commercial innovation needs to be implemented. It will have impact on a range of business capabilities and may need to be reconciled with other offerings or practices. Often there will be a need for new contracts or terms and potentially impact on business systems or skills. Without strong sommercial support, the innovation is likely to fail or under-deliver.

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