Fundamentals of Contract and Commercial Management

Jane Chittenden

• Publisher: Van Haren Publishing
• Year: 2014
• ISBN:
  9789087538118
• Edition: 1
• Topic: Education
• Subtopic: Education General

This ground-breaking title from the world's leading authority on contemporary contracting best practices, the IACCM (International Association for Contract and Commercial Management) delivers a lively and practical complete insight into the contracting process which is useful in both business and personal life. Contracts are the language of business, and this book gives readers the essentials that can make a difference to any deal, no matter how big or small. Designed for the non-contract business professional, this book takes project managers and other professionals through the basic process and gives them a road map to improved results, increased value, and successful outcomes In this book you'll find sensible guidance and approaches to ensure business success. Case studies showing you what can go wrong – and what can go right -- bring theory into the real world. Checklists give confidence and enable you to be certain that you have asked and answered the right questions as you go through any deal. This real-world approach demonstrates the value of effective contracting. This is not dry, academic prose. It is compelling and dynamic advice and tools to manage business relationships for both buyers and sellers.

PART 1

ESSENTIALS

CHAPTER 1

COMMERCIAL RELATIONSHIPS: BUILDING A FOUNDATION

Business is not just doing deals; business is having great products, doing great engineering, and providing tremendous service to customers. Finally, business is a cobweb of human relationships.

Ross Perot

1.1 The relationship continuum

The business world is full of relationships, with the most pervasive or critical being the one between buyer and seller. Every individual, regardless of title or other duties, is at some point involved with or affected by these relationships. Career and business success or failure can often be attributed to these interactions

Business relationships reside in a complex universe with infinite variables. While many have tried to document these, there is no global standard that applies across industries, geographies and types of product or service. One way to express this is as a continuum in terms of relative depth and complexity (Figure 1.1).

At the far left side of the continuum is the purchase or sale of a commodity item, which is generally executed with a simple transaction that may be repetitive. At the far right side of the continuum is the purchase or sale of products, systems, or services that are critical to business performance. These sales are generally the result of a relationship that is built and developed through several transactions between the buyer and seller.

Business efficiency demands that the right amounts of effort and resources are invested in each transaction. Understanding the big picture and where we fall on the continuum as both buyers and sellers enables us to properly focus our energies.

Figure 1.1 The relationship continuum

The relationships can also be seen as a pyramid, where there are numerous relationships at the lower levels and few at the top (Figure 1.2).

To provide an illustration of the different buyer/seller relationships, let’s look at a common item such as office supplies. At the first level we could consider a supplier of common items such as light bulbs, pens and paper. While variety and cost may be extensive, we are basically looking at a commodity where comparisons of value are easy to make. Commodities are generally considered to be consumable and are not usually capital expenditures.

Moving beyond a strict commodity we go to a category where some corporate standards are imposed. These purchases are usually of a higher value or considered capital expenditures. There will potentially be questions around functionality and fit. Following the office supplies example, this might be the standard office equipment of desk and chair, filing cabinets, floor coverings etc. Any supplier meeting the standards could provide the item.

Figure 1.2 Customer relationship levels

Transactions and suppliers move from this category of functional to value-added through exceptional performance or through additional services that are harder to copy or replicate. In the previous example, a supplier of the basic functional furnishings may move to this tier by offering free delivery, assembly, or design services, or through providing customized upholstery including corporate logos.

The final step of the continuum is that of consultant/critical business advisor. This relationship stands apart because of its role in the success of the business or some aspect of it. This supplier is often in a position to prevent or resolve other business problems through its understanding of the customer’s operations and creatively positioning its services and solutions to meet those needs. Continuing with the original example, this could be a designer or marketing professional who helped develop a corporate identity and translated that through to office designs, particularly in corporate space, or it might be an outsourced provider who takes full responsibility for minimizing cost and maximizing productivity through a customized office supplies service.

Suppliers of a commodity: In this relationship a supplier’s product is viewed by the customer as being exactly the same as several (or perhaps many) other products that meet the same specifications, grade and quality. Price and availability are the traditional differentiating factors in trading of commodities. Other examples might be paper goods, heating oil, hardware or any other product where there is little differentiation and no services are provided.

Suppliers of functioning equipment/systems: The seller is seen as a supplier of functioning equipment or systems with quality and reliability and a service that meets the customer’s minimum standards. Examples might include suppliers of computer servers, large-scale copiers, or corporate vehicles.

Value-added products/systems and service: The seller is viewed as a reliable and value-added supplier of products and services. Contractual arrangements are fulfilled on time, products are provided conveniently, and additional services may be provided such as training, technical or financing support. At this level, price remains important, but may not be the main criterion. The customer becomes less likely to shop around with competitors and the cost of switching may be high. Suppliers who are unwilling or unable to provide the extras cease to be competitors. Examples might include suppliers of integrated technology, engineering or construction services.

Consultant/critical business advisor: This relationship is based on not only providing value-added products and systems and extra service, but on helping the customer to deal better with some of its important business issues. The seller’s contribution is made by understanding the customer’s business situation and objectives, by generating workable ideas for solving problems, taking advantage of opportunities, jointly planning with the customer, being sensitive to the customer’s organizational issues, and being viewed by the customer as a business partner. Examples include large outsourcing relationships, especially in an area such as business process outsourcing, or high-value strategic consulting.

Looking across the continuum it is easy to see that the relationship within each category is different. On the transaction side, the costs and risks associated with switching suppliers are minimal and customer loyalty is generally low. Moving across the continuum those costs and risks increase exponentially along with the investment by both buyers and sellers.

We can see how these relationships are changing over time, with emerging needs for business success (Figure 1.3).

A business relationship may begin with a transaction buyer purchasing a commodity and progresses through time to a relationship buyer purchasing strategic supplies and solutions. A supplier may foster this relationship evolution by offering volume purchasing incentives or partnering with other vendors to provide enhanced solutions. When a buyer recognizes the additional benefits and business value that can be achieved, it assists this transition by discussing its overall needs with supplier...

Table of contents

• Cover
• Title
• Colophon
• Contents
• Acknowledgments
• Foreword
• Introduction
• Part 1 Essentials
• Part 2 The Contract Management Lifecycle
• Appendix A: Countries That Have Ratified or Accepted the CISG Convention
• Appendix B: Case Studies
• Appendix C: Glossary
• Index