As the number of different commercial models utilised by clients increase as well as their budgets getting tighter, the ability for your consultants, technical staff and project managers to understand the commercial side of a consulting or construction organisation is critical.
I am not talking about how to read a balance sheet or a profit or loss statement. It is not even about comparing budgets versus actuals. It is the ability to think commercially, understand risk allocation as well as being able to navigate the challenges that come with understanding the commercial drivers of your organisation. The problem with commercial acumen is that it is similar to common sense; it is not that common!
Some of the key areas that are critical for all client facing staff in service providers to be trained in commercially are as follows:
Risk allocation: Where do the risks lie on a particular project? Which ones sit with clients and which ones sit with your organisation? Understanding this allows you to manage this effectively but also trigger conversations with clients when these change over the course of the project.
Variation management: This is an area that is important to understand not only in maximising the commercial outcome of a project but to also ensure it is done in a way this is transparent, open and up front with clients. Train your people to understand the triggers for a variation, how to deal with clients in this area as well as ensuring lessons are learnt and applied back in to your organisation for future proposals and projects.
Qualifiers and assumptions: One of the biggest risks within organisations around commercials on a project is the transfer of the proposal from the people who wrote the bid to those charged with delivering it. This handover risk needs to be effectively managed. Know the qualifiers and assumptions behind the offering to the client. Further, understand how well these qualifiers and assumptions are understood by the client given that they could be the difference between a profitable and unprofitable project.
Know your contract: Contract knowledge is not just about understanding legal requirements or each clause in the contract. Understanding the contract is about ensuring you understand what particular areas or hot spots you need to manage and where they link to the key risks.
Understanding of different procurement models: Different procurement models are used for different reasons by clients which have different commercial objectives. Alliances drive different behaviours and commercial requirements to a PPP, EPC, EPCM or a design or construct. Understanding these different models at a high level and their application to your projects is important in ensuing you are commercially astute.
Understanding of different pain/gain frameworks: A number of clients incentivise service providers through bonuses and pain/gain models. These are utilised to drive outstanding performance on a project but can drive the wrong behaviours if not understood well by your staff. Understanding the drivers behind these, how they link to the clients key result areas on the project as well as linking them back to what is required to deliver high performance is important.
The importance of cash flow management: Cash flow management is critical to any organisation. There is no point making a project margin of 10 or 15% on a project if sloppy invoicing or payment means this is eroded by the business having to pay interest on an overdraft of 8% or higher because the payment did not hit the bank until after the project. Have a mobilisation invoice up front to make sure you are cash flow positive, invoice progress amounts and ensure you look for favourable payment terms that don’t erode your project margin. Knowing how to work through this with your client is also important as they may have different drivers that can allow for good cash flow outcomes for both parties.
Commercial acumen is not just a nice to have. It has become part of service provider 101 training for those organisations that are looking to achieve great commercial returns. Teaching your staff and arming them with this knowledge will lift the bottom line. Watch the dollars and commercial sense follow!