When should you inject Commercial Management into your business?

Whilst your business remains a start-up or a scale-up, you will always be evaluating the cost versus benefits of staffing for distinct functions. Sales and Operations are often the first to win the initial staffing budget of small businesses. Marketing and Finance are very commonly outsourced early on – until your spend on these services is big enough to justify a dedicated hire. Human Resources becomes a necessity soon after your staff numbers exceed the size of your family.

Not surprisingly, the need for a Commercial Management function is often overlooked, and dare we say often also misunderstood.

Partly to blame for this are search engines. We ran a quick search on Google for "Chief Commercial Officer", and were presented with three distinct interpretations of the role. 

Firstly, it appears that a Chief Commercial Officer is akin to a Chief Marketing Officer. "Maximize revenue performance" is listed on several Chief Commercial Officer job descriptions on Glassdoor.

Secondly, a Chief Commercial Officer is more akin to a Chief Operating Officer – acting almost like the shadow business owner, their perfect number 2, who has enough understanding of all other functions in your business to take over your role, if necessary. 

And finally, in very large public sector organisations, the Chief Commercial Officer is dedicated to managing the organisation's expenditure on and its relationship with its external suppliers. They bring a ton of value by providing expert commercial and contracts support. 

For the purposes of this post, we are going to refer to the Commercial function in the following capacity.

The purpose of a Commercial Management function is to utilise their commercial, contracts and supplier relationship management skills to recognise and improve working practices, with the overarching aim of maximising value on goods and services at an appropriate level of risk.

 

Why would you need Commercial Management?

There are four main triggers to decide if you are ready to make your first Commercial hire:

1) When you’re landing your first big project. 

2) When you start dealing with risk-averse clients. 

3) When you want to back your offer with a big promise.

4) When you want to develop an alternative route to market.  

In the next section, we will describe these four situations in more detail.

1) Landing your first big project

Are you about to land your first big break…? Landing your first big project can be incredibly exciting. By potentially doubling your earnings you can build a more successful business. However, a big opportunity also equates to a big risk and you will find yourself at a higher risk of failure.

At the outset, for instance, you don’t have the resources and capabilities to fulfil a project that is many times bigger than the size of your typical engagement. Furthermore, once the project is complete how do you reallocate the resources and capabilities you acquired for that one project? 

How can a commercial professional help?

A commercial professional will be able to advise if a project is too big to take on. Rather than focusing on whales (projects over 50% of annual revenue) which swallow you up, it is advisable to upgrade your small fish to medium-sized fish (projects around 10-20% of annual revenue). 

Whales can often be a vanity metric and cause more hassle than they're worth. It is much more advisable in the long run to find clients who care about partnership. Therefore, your sustainability becomes important for them too.

 

2) Dealing with risk-averse corporate clients

As you start to work with bigger clients, you may notice that a larger proportion are more risk-averse. When organisations grow in size they become accountable to an ever-growing number of stakeholders. Thus, they often become more risk-averse. This paradox is referred to as the paradox of size. 

However, unhelpfully for you, they may try to dump all of their risk on their supply chain. It is the path of least resistance, and a practice highly prevalent in the supermarket industry with the big supermarkets using their clout to impart onerous terms onto their suppliers. Not surprisingly, we hear frequent news about suppliers locking horns with the big supermarkets - a classic David-Goliath standoff. 

How can a commercial professional help?

A Commercial Manager is a contracts expert so they can handle the regulation of contracts, ensuring your business isn’t shelved with onerous terms. Moreover, if a dispute arises, a Commercial Manager will be able to use their dispute resolution expertise to solve this problem. Entrepreneurs at the receiving end of onerous terms, find it far easier to tell their customers that the contract does not pass their internal compliance checks, than simply saying "I don’t like it."

 

3) You want to back your offer with a promise

Due to economies of scale, in most industries, SMEs can’t compete on price with larger competitors. However, you can make yourself stand head and shoulders above your competition by creating a compelling offer that is backed with a promise. There are several ways in which you can do this:

  • Use a subscription model – Also known as the 'Netflix' model. Customers pay a recurring monthly fee for access to your product/service. 
  • No win / no fee – This is a common tactic used by legal professionals. If your solicitor does not win the case for you, you are not required to pay the legal fees.
  • Guarantees – You can lower sales resistance with a risk reversal guarantee or unlimited option. Customers can try the product/service before they buy it, with the reassurance of a no-nonsense money-back guarantee. 

Such offers go a long way in building your USP as an operator in your industry. However, they can also be double-edged swords. Specifically, let’s take the subscription model as an example. Although it all seems hunky-dory whilst your subscription fees trickle in month after month, you are running the risk of being a restaurant with an “always open” sign board. Could you really meet your service levels with 80% of your subscribers making demands of you in the same week? 

How can a commercial professional help?

A commercial professional can flesh out and quantify the risks of making a bold offer to the market. They can minimise the risks through terms and conditions, whilst retaining the essence of your offer. You can argue that lawyers can do a better job of writing terms and conditions, but they may not be best placed to understand where to 'give' in order for the offer to retain its attractiveness to prospective customers.

 

4) You want to develop an alternative route to market

Developing an alternative route to market can help you reach new customers and spread your risk. A strategic partnership, which is a voluntary agreement between two or more companies, is a great way to grow your business. A successful partnership will generate economies of scale and help improve the perception of your firm. 

A prime example of a successful strategic partnership is between Nike and Apple who pair their respective products and technology. Positive network externalities exist because the value of a Nike product is enhanced by pairing it with an Apple product, and vice versa. Therefore, customers of Nike and Apple are incentivised to purchase products from both organisations, rather than their respective competitors.  

How can a commercial professional help?

A commercial professional can help set up and manage the strategic alliance. Firstly, they can help identify and select partners, and 'contractualise' it. Secondly, they can evaluate the success of the strategic alliance by assessing performance and making adjustments. Furthermore, acting as a relationship manager, they can regulate the strategic alliance through conflict handling.

 

What are the cons?

It is true that from a cost perspective, hiring a Commercial Manager can rarely be justified as one of your initial hires. Sales, Marketing and Operations are required functions for early validation and endorsement of your business by its customers. 

Helpfully though, you shouldn't have to miss out on commercial expertise whilst the business case for a full-time hire remains less than robust. Commercial expertise can be bought in effectively and efficiently through the use of consultants. For example, at Mindful, we offer Virtual Commercial Services that offer customers exactly that.

There is also a chance that having a commercial professional on board can result in you being less-liked by your customers. If you've been unfortunate enough to be involved in a road traffic accident that wasn't your fault, you would know. The other party's insurer will often try to contact you directly to get you to accept a deal before you have had an opportunity to take your own independent advice. 

The same principles apply to significant commercial dealings with big businesses. With commercial advice, you may end up being less than best mates with your customer. However, without it, it's unlikely you will have agreed to the best terms you could have. The balance you can strike is to deploy your commercial function on significant undertakings where it's less than convenient for your prospective customer to not do business with you.

 

Final thoughts 

A commercial professional certainly plays more than a 'nice-to-have' role in any business.

By injecting commercial expertise in your business at the above-mentioned trigger points, you will be setting up a platform for sustainable and risk-managed growth of your business.

This article was written by Amit Kapoor, Director of Mindful Contract Solutions, and a commercial consultant with more than a decade of experience in supporting a diverse clientele including small businesses.