Commercial Skills for Leaders

What it was:

A one-day course on commercial skills as part of the Future Leaders Scheme in Pimlico, London on 17 October 2018.

Key outcomes for the course:

  • Build individual confidence in commercial work and decisions
  • To ensure that we are applying good commercial judgement (not falling into just commercial compliance)
  • To assist in “doing the right thing”

What I learned:

The commercial context:

  • General shift away from simple buying of goods as a customer, to more complex supplying of services in a partnership
  • Tempo and change are only increasing

Commercial management is:

  • The alignment of stakeholders to increase the probability of a successful outcome from a trading relationship
  • The business discipline that ensures all relevant stakeholder views are incorporated and evaluated…
  • …So that customer needs and supplier capabilities are aligned, and commercial risks are identified and managed

It’s worth understanding the level of mutual commitment between the supplier and customer. There are some parallels with public relations. Getting alignment is something that senior leaders work on, it is not something that you can delegate to commercial staff.

You need to understand what your desired business outcomes are before you can communicate them.

The contract is at the end of a long process of decision, exploration and alignment.
You should spend most effort before and after going to market, not during the procurement process (the DNA model)

A survey showed around 9% of project value leaks away… Top sources are lack of clear scope and goals; involving legal and contract teams too late; failure to engage stakeholders; adversarial negotiations

Think what will drive supplier behaviours… Can often be better to focus on outcomes not process. Otherwise it may drive perverse behaviours, e.g. an IT helpdesk may be paid by number of calls handled when actually fewer IT problems would be a better metric

Inception, initiation and pre-policy:

Aim to be an ‘intelligent client’ in the inception phase
Aim to achieve an honest appraisal of needs, opportunities and possible approaches

What questions should you ask to enable intelligent business decisions?
* What is the vision for this project / relationship?
* What commercial outcome is being sought?
* What are the major risks and opportunities?

Pre-procurement

  • What structure of relationship with suppliers do we need?
  • Reflect on the importance of creating a joint team
  • Assess the three Rs:
    • Risk: commercial, financial, business/reputation, market
    • Reward: incentives, payment mechanisms, reputation, contract extensions
    • Remedy: legal measures, liabilities/indemnities, liquidated damages, termination
  • Understand the longer term impacts of decision making in terms of contractual obligations, cost, IPR, legacy and how to manage these to deliver the goal

What type of agreement to use?

  • Ensure advisors provide pros and cons
  • How will the model cope with future changes?
  • Every requirement has a cost, direct or indirect
  • Evaluate the true cost of risk transfer
  • Act as intelligent client with advisors
  • Plan for exit from the very beginning

Case study: delayed development of a new aircraft. What went wrong?

  • Enhanced risk from their extended network
  • Once issues began they compounded themselves
  • Unable to control critical elements of the supply chain
  • Organisation was not ready for the communication levels required
  • Heavy outsourcing but lack of supplier relationship management
  • …Could this happen in Government? What could you do to prevent it?

Different contracting terms are of different importance depending if time, cost or quality are the most important

Relationship management

The impact on outcome success in rank order:

  • Communication
  • Risk allocation
  • Problem solving
  • No blame culture
  • Joint working
  • Gain and pain sharing
  • Mutual objectives
  • Performance measurement
  • Continuous improvement

The more people oriented things are highest on the list. Contracts are ultimately between people. Lawyers may see a contract as a means of limiting risk but most contracts are driven by economics.

What does this mean for the leader?

The agreement type needs to be the right one, so consider:

  • Risk, reward, remedy
  • Long term impacts of decisions e.g cost, obligations, IPR
  • Flexibility to change deliverables following changes in technology, needs or capabilities
  • Focus on the objective and define it clearly
  • Ensure communication is appropriate, timely, efficient, two way and honest

What can go wrong?

Lessons from case study exercise:

  • Don’t forget the broader landscape
  • Get policy right before you start
  • Design your strategy in the context of common causes of failure and identified best practice
  • Poor relationship set-up and management can destroy value
  • Beware of having too many variables outside your direct control
  • The final price is almost always higher than the day one price
  • Understand whether you are a customer or a partner. If the purchase is not simple then likely you are partners!
  • Accountabilities are difficult where contracts are very long and people turn over rapidly
  • Always put the effort in to understand up front.
  • It’s worth revisiting these case studies

Lean sourcing: commercial aspects of sourcing and understanding suppliers

  • Understand what motivates and constrains your suppliers
  • Your goals and your behaviours impact the behaviours of your suppliers
  • Build effective relationships through collaboration

 

What is true collaboration?

Assertiveness is concern for own needs
Cooperativeness is concern for others’ needs
True collaboration is when assertiveness and cooperativeness are both high.
This is the creative, win-win zone with principled negotiation
Competing is high assertiveness, low cooperativeness; power relationship, win-lose, at the expense of the other
Accommodating is low assertiveness, high cooperativeness, caving in, lose-win
Avoidance is low assertiveness, low cooperativeness; nettles not grasped, lose-lose
Compromise is in the middle – not getting best value, partially factory to each

Alignment of goals (BP case study)
Contract looked too narrowly at performance KPIs
Contract incentivised corner-cutting
Relationship performance should be built into contracts and in ways that benefit all parties
Suppliers may downplay failure. Conversely, as customers we often struggle to have a honest conversion about performance
Open book contracting may have been better… That means being open about costs and collaborating on what costs can be reduced and what can’t

Take away questions you could ask:

Capability:

Use your leadership capability to maximise the commercial result for the crown
Leverage and enhance your team’s capability to deliver
Incorporate and engage your suppliers as part of the team
What are the measurements and objectives of your staff and the impact these have on their behaviour

Set your objectives wisely:

Focus the team on the key outcomes:
Do your agreements encourage our discourage innovation or continuous improvement?
Is your approach to risk allocation and risk sharing having the desired outcome?

Managing contracts, implementation and post contract change

What reviews do we need? Some ideas:
Check understanding of outcomes
Check quality of relationship
Active risk management
Lessons learned and improvements
Joint board for project delivery plan
Shared risks and mitigation actions

What commercial aspects to monitor as a minimum?
Compliance with the conditions and schedules
Disputes, claims, escalations
Balanced score card
Contract calendar
Change control
Q & A database

Top sources of value leakage identifed by the people in the room:
Lack of clear scope and goals
Contracts lack flexibility and governance
Weak post-award process gove

Exit planning

You need to start planning for exit before you draft the tender
Includes: early termination, end of contract, transition, ongoing obligations

Exit questions
How can we learn to take to new projects?
How do we maintain a competitive option (not create a monopoly)?
How do we minimise risk in transition (e.g. licenses, assets, access to facilities)
What do we do with the people, the assets and the IP?
Do we have to run another tender for a follow on service?
What are the obligations on incumbent to support transition?
How do we safeguard the service to the end of the contract (e.g. maintain supplier enthusiasm)?

Bringing it all together:

The golden rules:
Ensure an appropriate stakeholder analysis
Test for realism – how do we know this can be done?
Ensure common understanding of goals and benefits
Validate capabilities, trust but verify
Don’t rely upon negative performance incentives
Apply rigour, but that does not mean be adversarial

Final thoughts:
Behind almost every successful endeavour in Government is a successful contract
The three Rs in commercial decision making: risk, reward and remedy
Contract terms and commercial vehicles largely drive how people work with us

Liquidated damages mean pre agreed recovery of costs e.g. for production delays caused by unscheduled maintenance

What I will aim to do differently as a result:

Set vision and outcomes for commercial engagements, not just deliverables
Ensure my team have the support and advice they need on commercial engagements
Get senior buy in to what we are contracting for, i.e. the outcomes
Surface and address challenges around all the contacts we operate
Make more time for long term planning and thinking… This is a key part of leading.
Remember to revisit this learning as there is a lot of content here.
Try to ensure that teams are genuinely collaborating, not competing, accommodating or compromising