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How the reinvention of Finance will impact commercial management and contracts

September 28, 2020

For all their depth, Finance departments frequently lack breadth. Like so many professions, the last 30 years have seen ever greater specialism and with it, they often risk a reduction in understanding of overall context. This is not helped by the disconnected nature of data, stored in specialist systems that reflect organizational divides.

The pandemic rapidly brought these weaknesses into stark relief. Financial publications are full of stories about the lack of reliable data to support CFO decision-making. Much of that data relates to contracts, since they fuel most businesses’ income and a large part of their expenditure.

Commercial and contract teams need to engage. They have a massive impact on financial performance and also on the ability to extract and report on the data needed to predict and measure. Here are the primary areas where we should be leading or contributing.

Scenario planning to the fore

One consequence of current uncertainty is that many finance teams have changed their approach to budgets and forecasting. For example, one $85bn group now develops rolling forecasts for the next 18 months, combined with scenario planning to provide a flexible response to fast-changing global conditions. “We don’t have one point of view for the next 18 months, we have multiple points of view of what would happen in different sets of circumstances and assumptions,” says their CFO.

“We need to be agile”

In line with this scenario-based approach, agile budgeting is back on the agenda, with a need to be far faster in setting budgets and more flexible in their management. This is also true of the way we form and manage contracts. Gone are the days when contracts should be designed to constrain change. Instead, they must anticipate that change is the norm and enable it to occur in a timely and disciplined fashion – essentially mirroring the scenarios adopted by their Finance function.

Cash is king (and queen)

Interviews tell us that organizations are streamlining their cash flow and forecasting. Again, since cash flow is driven by contracts, they have a fundamental role to play. Better understanding which terms have impact on cash is one element. Another is to establish dashboards and analytical tools to monitor the contracts portfolio. As Treasurers focus on the centralization of payment processes, forward-thinking commercial teams have been building tools to monitor customer performance – who is paying late, who is asking for payment holidays, who is pushing to reduce commitments. All of these factors provide indicators of where there is risk of default or delay, allowing protective measures to be put in place.

Do we want this customer?

There is extensive conversation within Procurement teams about diversifying supply and holding suppliers to account. But what about holding customers to account? Financial fragility goes in both directions and suppliers do not want to be caught out by customers who fail to pay their bills. Again, contracts teams are being called upon to explore the performance of customers and to devise commercial terms and strategies that protect the business – including ‘no bid’ decisions.

CFOs love connectivity

“RPA ‘accelerating digital transformation’ in providing end-to-end integration of data flows”. This was the recent headline in one financial publication. CFOs have recognized the exposures that arise from fragmentation of data across multiple systems – which means their attention is turning to the need for investment in the contracting process. Even now, they may not think of it as a process, but they do at least appreciate that data needs to be linked to the relevant contract, not hidden in different functional software. Contracts professionals have a critical role to play in supporting or leading this digitization initiative. They face many challenges – not least identifying and making sense of current data. This has indicated the urgent need for consistent metadata extraction and storage, using consistent naming conventions – itself a massive challenge in the typical highly distributed world of a large organization.

Urgency is not an option

The situation we face requires immediate action. It provides an opportunity for forward-thinking contracts and commercial professionals to demonstrate their relevance and to build a stronger relationship with their CFO.

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