I was minding my own business when the phone rang. I had a feeling that I should not answer it, but as I was running a business and had six kids, two wives and a fish to support I thought that my bank manager would be pleased if I did … so against my better judgement I answered it. This call turned out to be a sad story of contractual neglect and lack of business acumen (or “street smarts”). This construction industry case was good to me as I made my bank manager happy and for years gave me terrific case study material to talk about in class. However, it was not very good for the parties, but as you will see they caused and indeed magnified the problem.
What is “acumen”?
But before we consider the case we should look at what “acumen” is. There is no single definition of commercial acumen but it includes:
- Understanding the organisation’s business model and how it makes money
- Knowledge of organisation-specific processes and product offerings
- Financial literacy
- Analysis and interpretation of financial data
- Awareness of laws that affect the organisation and its operations
- Market awareness.
In essence commercial acumen is the ability to deal with a business situation in a way that is likely to lead to an effective outcome. Commercial acumen for contracts professionals is the ability to achieve effective commercial contracting outcomes for one’s organisation. It is this latter definition that we focus in this article and in the forthcoming acumen courses.
The big case.
Now back to the case. The buyer was an industrial company that needed a manufacturing plant built on its land. It put out a tender for its design and construct contract and had a choice of 10 vendors. It chose the very cheapest contractor and as a reward it got a cheap job and a lot of dubious variation claims. The final product was that the plant just did not operate as it should, and indeed it was closed more often than it was open. During the construction the buyer was very slow in telling the contractor about problems, and indeed several times the buyer’s representatives without checking the work signed off stating that work milestones had been done to its satisfaction! After much sword rattling the parties decided to each walk away and pay their own professional costs.
The buyer now has a plant that does not function as it should, some of the buyer’s contracting staff have new jobs and the lack of business acumen resulted in a redistribution of money to lawyers, accountants etc. Each party spent about $500,000 in professional fees (I was the forensic accountant expert who prepared a report for the court as to the amount of damages suffered by the owner of the land).
Other cases of neglect.
Here are a few other real-life examples of where commercial contract acumen was lacking. What is concern is that the disasters could have been overcome with some “street smarts”:
- Construction industry disaster – The first case is the construction company that took on a project in an unfamiliar type of construction and agreed that payment of the $100 million fee could be made at the end of the job. Here immediately one can see several key risks: working in an unfamiliar type of construction, accepting a lump sum amount to be made at the end of the project. As fate would have it the construction company spent $120 million and the project was not complete and there were disputes as to the quality of the work. Without working capital the construction company went into insolvency. This case is an example of how the lack of street smarts lead to the destruction of the business.
- Primary produce industry disaster – Hurricane Mitch in 1998 hit the Caribbean area very hard. It destroyed most of the banana crop for the two major banana suppliers, A and B, who supplied the world’s major markets. A was able to meet its sales commitments because it had sources of bananas from around the world, including from Australia. B, unfortunately, strategically decided to only grow in the Caribbean and was thus unable to supply bananas to its customers and significantly lost market share. This strategic decision was very costly for B. This is puzzling – why only grow your fragile banana plants in an area that is susceptible to frequent banana damaging hurricanes? This is another example of lack of street smarts.
- Manufacturing industry disaster – At about the same time a manufacturer of containers received a large order from multinational X, and a similar one from multinational Y. Both were for the same product. Unfortunately, the business case for the orders were handed by different staff. The contract with multinational X made a significant amount of profit, but the other one made a significant loss. Why? The vendor did not have a process involving business cases and pricing in general, nor were large projects required to be verified by a finance professional. This case is just more of the same.
What can you do now?
So I think you get the message. Clearly you can see that an organisation needs capable contracting people and capable contracting processes. Now that I have identified the problems via my case studies, come to my class and let me show you how to in a structured way identify the key risks in the legal, finance, negotiation, risk, relationship and other areas and how to mitigate these risks. I’d love to say that I will help you to eliminate these risks, but often this is not the case. So I will try my hardest to show you how to best mitigate your risks.
Dr Cyril Jankoff is a qualified lawyer and accountant, an MBA and has completed a Doctorate in the area of business improvement and acumen. He is certified by the International Association for Contract and Commercial Management as an Expert Level Supplier Relationship Management Professional (“SRME”). He facilitates his Commercial Acumen course for Contracting Professionals courses in Australia and internationally. Comprara will run the next Commercial Acumen Course in Melbourne on 7 December 2016, and can arrange in-company courses anywhere in Australia and overseas. No animals or any procurement professionals were harmed in the writing or publication of this article. Dr Cyril’s expert knowledge, lively personality and fabulous teaching make him a perennial favourite with participants at all levels. Some names, dates, places and facts in this article have been altered to protect the innocent and the not so innocent.
