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Revisiting commercial arrangements in uncertain times

In an era defined by unprecedented disruption, this article revisits the critical concept of "Disruption" and its profound impact on businesses, urging them to embrace agility and strategic commercial practices to navigate the ever-evolving landscape of challenges and opportunities in 2023.

At the beginning of the year, we broached this subject, given the turbulence we anticipated would impact a lot of businesses across the year. So here is a revisit and a refresh on something that all businesses should be aware of and be prepared to challenge.

We are constantly reminded that we live in unprecedented times. Often this is used in reference to COVID-19 and the impact it had on business and the general population, however in a wider context “Disruption” is rampant.

Back in February, we defined “Disruption” as the occurrence of a significant event beyond the control of an organisation that requires a response in its operating model to remain commercially viable.

A typical example would be a new market entrant armed with a non-conventional and low-cost business model to challenge and potentially replace existing market operators. However, it could be anything and more holistically include geo-political influences, technological, or environmental.

Because of the potential or real threat of disruptors to your business, it's important to adopt an agile mentality and instill practices that better align with a more agile way of operating. Part of that includes negotiating and contracting commercial terms with other organisations.

That can be extremely difficult to achieve where there is a dominant party or when engaging with a large multinational where teams of lawyers are required to affect the slightest change in standard terms.

Notwithstanding this, we still feel it is worth pursuing and give some insight into areas for consideration:

  • Focus on the commercial arrangements that have the greatest impact on your business. Given your financial and time resource is probably constrained, it’s important to prioritise from the most important to the least.

  • Understand the costs, pricing, and cashflow consequences of the starting position vs. where you end up.

  • Focus on a “win-win” outcome, so the right behaviours are encouraged by all parties - It’s an old adage but still has resonance today.

  • Maybe think about replacing punitive clauses for non-compliance with rewards for achieving agreed key performance indicators and outcomes that benefit all parties.

  • Consider the time vs. value trade-off. Contracts with longer-term commitments typically attract preferential pricing, however in the face of disruptive influences, businesses are now seeking out shorter terms. Matching margins and pricing with revised contract lengths is important.

Whereas in the past key contracts were maybe reviewed annually or bi-annually, a more constant review of these contractual arrangements should now be built into your quarterly or half-yearly performance reviews, to ensure those terms and arrangements still fit with your requirements.

2023 is a year of adjustment to constant “Disruption” and challenging market influences, so if you would like us to review your current commercial arrangements, whether documented or not, or to assist in financial modelling please reach out.

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