Commercial or business acumen is a term that is being seen more and more frequently in position descriptions, “candidates must be able to demonstrate strong commercial acumen skills”, but what does this actually mean, how important is it, where do you learn it and how do you get started?
When someone says ‘Commercial Acumen’ your first instinct may be that its about understanding the financials of the business like being able to read and interpret a profit and loss statement or being able to effectively manage a budget. However while there is an element of financial nous involved, true commercial acumen involves so much more.
Put simply ‘Commercial Acumen’ is the ability to view situations from a commercial or business perspective. It is about being able to think commercially, understand risk allocation between you and clients, develop strategic relationships, apply commercial expertise to achieve business objectives and navigate the challenges that come with understanding the commercial, financial and business drivers of your organisation.
The question is though, where do you learn and develop this knowledge when you are a young technical professional just starting out on your career, when you are changing careers or industries or just looking to improve your skill base? Previously commercial acumen was something that was learnt on the job as you progressed through your career. The skills required for commercial acumen were generally developed through being coached and mentored by someone senior in the organisation, through on the job experience or by making and learning from your mistakes on projects or large contracts.
However times have changed and business has gotten increasingly complicated. The result of this is that businesses generally now cannot afford the luxury of allowing their people to learn this critical skill over a long time period through on the job experience. In addition senior people in the organisation are often too time poor to spend the time coaching and mentoring their staff on commercial acumen.
To get you started on the road to being a true commercial champion below are my top 10 tips to increase your commercial awareness and improve your commercial acumen skills.
- Understand risk allocation and be able to strike the right balance between risk and reward: In particular when working on projects within your organisation that involve third parties it is critical to be able to understand and evaluate where the project risks lie and how to fairly and equitably allocate those risks between the client and your organisation. A discussion around risk allocation on a project is something that should be done upfront before work commences as it assists both organisations in being clear about their roles and responsibilities, ensures alignment of expectations, enables accurate and reasonable pricing of risk and is useful for building relationships.
- Implement a peer review process for your costing’s and proposals: No matter how senior the individuals are or how strong their commercial acumen skills are, it is human nature to make mistakes. Therefore when costing up projects or preparing a proposal it is important to get someone independent to commercially review your work regularly during the process. If the proposals your company submits are comprehensive, accurate and reviewed by the appropriate people, it can significantly impact the volume and magnitude of markdowns, take on board previous lessons learnt and improve your bottom line.
- Focus on Building Relationships: Contracting is just another relationship and as with all relationships it needs to be mutually beneficial in order for it to be effective. Taking a healthy constructive approach to contracting from the start of the engagement will allow the delivery of great outcomes for your projects that mutually benefit both parties.
- Understanding how your business and your clients/suppliers make money: The main objective when pricing a proposal is to ensure it is competitive as well as providing a reasonable return back to your company. It is imperative that the charging basis chosen for a proposal allows for full recovery of the direct labour, labour on costs, and all other business costs (overheads) incurred in providing the service. As a business understanding your costs and how they apply to different scenarios is critical to ensuring this occurs. It is also important to understand the pricing models that your client/suppliers use to make money as this will enable a commercial assessment of whether they are making fair margins and if the services they are providing represent value for money outcomes for your organisation.
- Read and understand your contracts: Your contracts should not be a document that sits in the bottom drawer until problems arise. It should be a living, evolving document that responds to changes in events and circumstances during the course of your contractual relationship. It is critical as individuals charged with managing these contracts that you know your contract in great detail. By this I am not just talking about understanding the legalities of each clause in the contract. It is about understanding the key deliverables and milestones and working with your supplier to achieve outcomes as well as understanding the particular areas or hot spots you need to pay close attention too and where they link to the higher level objectives of the contractual relationship.
- Cash Flow Management: It is essential to understand the importance of cash flow into a business and how decisions that you make can impact on that cash flow. So if you have agreed to 60 day payment terms on a big project with a lot of upfront costs, there may be a significant amount of money flowing out of the business before your first pay check arrives. You need to understand and be able to analyse what impact is this going to have on the short term cash reserves of your organisation and its ability to meet its other expenses. Tips to remain cash positive include having a mobilisation invoice up front to make sure you are cash flow positive, invoice progress amounts and ensure you look for favourable payment terms that don’t erode your project margin through not funding the overdraft and drawing costs.
- Know the tips and techniques you can use to increase profitability: There are a number of methods that can be utilised within your organisation to increase project profitability and margins as part of your commercial pricing strategy while still maintaining the competitiveness of the services of your company in an open market. Understanding how to effectively utilise qualifiers and assumptions in your project bids and effectively recover costs through your charge out rates, project expenses and labour hours are critical skills that can be the difference between a profitable and unprofitable project.
- Manage your projects to deliver on agreed commercial outcomes: After you have set up your project for success it is essential to you ensure that all that good work that was done upfront is not lost in the project delivery stage. It is critical to ensure roles and responsibilities are clearly defined, alignment is achieved on the behaviours expected of project participants and you are continuously measuring and monitoring the outcomes of your project to ensure you stay on track.
- Managing budgets and variations: The most important factors in being able to effectively manage your budget is understanding how that budget was arrived at, who the critical stakeholders are who can help to deliver the budget and interrelationships between this project and other projects that may impact on your budgets. Variations are one of the biggest triggers for budget blowouts so it is important that you analyse the project upfront to understand where the variations are likely to occur and manage this throughout the project with stakeholders to mitigate their occurrence by understanding the potential triggers for variations and managing them throughout the project in a way that is transparent, open and up front with clients.
- Know your end goal and how you are going to get there: “If you don’t know where you are going, you’ll probably end up somewhere else.” Knowing the big picture of your organisation is important as this will enable you to understand the higher level strategic objectives of your business and how the work that you do and the projects that you work on aligns with those objectives. On a more micro level though it is also important to understand the end goal of what you are trying to achieve on your projects, this can be done through the establishment of key result areas and key performance indicators on your project which helps you to focus your understanding on what you want to achieve, how well you are tracking, how you will know when you have met your goals and what you can do better next time.
Improving your commercial acumen is not something that can be achieved overnight; it takes dedication and continued application of the above tips in practice to truly become a commercial champion. However the benefits are immense not only to individuals in terms of career progression and opportunities for development, but also for businesses. Teaching your staff and arming them with commercial acumen knowledge will improve your commercial returns and lift the bottom line of your organisation, and in the current economic climate, isn’t that what we are all trying to achieve?
For more information about in-house commercial acumen training that can be customised to your own commercial models and covers the Top 10 Tips outlined in this article, please contact BRS or see our commercial acumen brochures here