Understanding the value of commercial specialism

In a prior article from our series Transforming performance of major programmes, we looked at the importance of fully integrating commercial and delivery models to enable an optimised commercial approach. Here, we turn our attention to understanding the value of commercial specialism.  

Every commercial or delivery model requires a tailored set of capabilities to successfully implement it. To effectively implement these models, the right structure and skills must be in place – supported by optimal systems, processes and digital tools that are carefully aligned to the risks and opportunities that the project or programme owner has to manage. 

To successfully deliver any commercial model, organisations need the insights and capability structured within teams to understand, develop and implement it, which raises an important question: how and why should commercial capability be integrated into an organisation to drive value and performance across the life cycle? 

The importance of commercial specialism 

Today’s projects and programmes consist of unparalleled levels of ambition, complexity and risk, with complex interfaces throughout supply chains, meaning business cases and commercial arrangements have to be more flexible and fine-tuned to underpin successful delivery of outcomes.

Organisations therefore need commercial thinking to balance value, risk and reward to drive commercial performance, all while creating an important tension between commercial rigour and the desire to deliver outputs. 

“To achieve these commercial objectives, it is no longer about simply negotiating a good deal with suppliers or focusing on budgets, procurement or contractual arrangements.”

It is instead about considering the broader benefits and priorities around environmental, social and governance (ESG) objectives – whether that’s delivering an investment portfolio, a programme of individual projects or one major project. 

An integrated commercial function enables dedicated experts to focus on the desired outcomes with a commercial mindset, as opposed to the activities being disaggregated and performed as part of other disciplines or functions. These experts understand the wider market risk and opportunity, as well as the client partners’ and suppliers’ vulnerabilities, the contractual setup and the liabilities or responsibilities that sit with each party. They can therefore foresee and mitigate the risks before they occur.

Global approaches to commercial delivery 

Globally, the approach to the commercial function varies. In the US, large infrastructure programmes are typically delivered on a DBB (Design-Bid-Build) or progressive ‘guaranteed maximum price’ basis, meaning the commercial input is focused around cost control, estimating and risk transfer.  

In Canada, there has been a shift to target price contracts and a broader set of commercial capabilities. In Europe, the commercial function has not been recognised until recently, and the Engineer covers the many of the commercial management activities in cases where the NEC form of contract is not used. In Australia and New Zealand, the scope of the commercial function is expanding, now covering ‘transaction management’, which addresses the procurement process from early market engagement through to contract award. 

With a highly competitive global market and consolidating supply chains, it is important to look at risk transfer and contractual terms through a much broader lens. As such, time must be spent at the outset of a project or programme looking at market capacity and risk appetite to inform the commercial approach to promote market interest.

This informs another shift towards more collaborative contract forms, leading towards the need for more commercial capabilities throughout the project life cycle.

 

“Constantly re-evaluating how we conduct ourselves with the supply chain as customers or clients is a key part of ensuring our programmes deliver and our people stay motivated by our profession.”

Ruth Todd CBE
Commercial Adviser, Major Programmes 

The benefits of structured commercial leadership 

It has been almost a decade since the UK Government first appointed its own Chief Commercial Officer (CCO) with the job of ensuring that a clear commercial strategy and capability is present when delivering major investment programmes, and many UK public-sector organisations have since followed suit. 

Many organisations are now moving their commercial capability out from under finance or project control directorates into dedicated commercial departments with an executive-level commercial director who ensures a clearer focus on value throughout the delivery of the desired commercial objectives. 

“The separation of the commercial function provides additional negotiating levers and enables collaboration, debate and negotiation before turning to potential litigation.”

It also supports proactive commercial risk management, helping organisations get in front of the things that could go wrong, rather than reacting to them later in the life cycle.  

Many other industries have also recognised this skillset for some time. Chief Procurement Officers have been prevalent in industries such as automotive for decades, but the rise of CCOs in the built environment, and more widely across the public sector, shows the mindset shift and value of a dedicated commercial function. 

Creating a single point of commercial leadership within organisations signals the high priority a commercial discipline, ranking it alongside other key departments. It is not an end in itself, but a sign of commitment to commercial value that offers clear leadership at a senior level and facilitates the integration of the commercial strategy with the delivery model.  

Further to this, it enables the recognition and sponsorship of individuals who demonstrate high commercial acumen and brings together the right organisational skills and capabilities, so organisations are commercially strong in any operating model. 

But integration is crucial. A high performing commercial function cannot operate in isolation. It must integrate with and balance the requirements of other functions. This includes delivery, engineering, legal and finance – informed by robust controls, performance data and intelligence to arrive at the optimal commercial strategies and decisions.

Maintaining this positive trajectory 

Creating dedicated commercial leadership roles is one thing, but embedding knowledge and appreciation for commercial approaches is a bigger task – as is the creation of fully equipped commercial teams. This stems from the competition for talented yet scarce resource, the scale of investment ambition ahead, and because the complexity and importance of the role is inevitably going to increase over time. The profession must therefore also be set up with digital tools and systems to enhance commercial insight and value. 

Moving towards aggregated and dedicated commercial functions will enable the development of more nuanced commercial models and strategies, which underpin successful outcomes and prompt a step-change in commercial performance and enhanced value to clients and society more widely.