The paramount concern for all companies is the safety and well-being of their people, customers and communities. At the same time, they are also having to respond to the sharpest commercial downturn in living memory.
Beyond mitigating the immediate impacts of that decline, what steps can businesses take to ensure they emerge stronger and more resilient on the other side of the crisis? This report sets out six elements essential to optimising your commercial capabilities – ensuring your business is future-proof and ready to hit the ground running when the recovery eventually comes.
Short-term measures, longer-term thinking
The breakneck speed at which COVID-19 has upturned the global economy will inevitably mean that commercial controls have been relaxed, particularly for non-essential goods, as many sales teams chase volume without always assessing profitability.
That said, relaxing commercial controls – through, for example, increased discounting – will only work while customers are actually buying or still able to buy. In cases where entire markets are shut down, this approach does little to stimulate demand. Supply chains will also have been disrupted and production assets mothballed as an immediate response.
The length and type of the downturn will vary from industry to industry, ranging from slowdown to a complete stop in activity. The risk for those businesses hit hardest is that commercial behaviours learnt during the crisis end up becoming entrenched. When the upturn does finally arrive, these businesses could remain fixed in a downturn mindset and miss the opportunity to rebuild their profitability.
The situation will often be complicated further by an inexact view of true commercial performance. This is largely because ‘standard’ cost models will not capture the current positions. The impact of commercial decisions taken under pressure in a fast-moving, unpredictable environment will therefore not become apparent until further down the road, with the potential risk of damaging consequences emerging later on.
Moreover, the recovery, whenever it comes, will not happen at the same speed in every location. Businesses will need enough flexibility in their commercial strategies to deal with differing levels of supply and demand within and across geographies and segments.
This paper therefore sets out the commercial capabilities and operating model that businesses should be investing in now to ensure they are ready to thrive when the recovery comes.
Six steps to improving your commercial capabilities
There are six main areas that companies need to focus on in order to enhance their future commercial capability:
1 . Commercial strategy
How do you clearly define your commercial goals, in terms of revenue, margin and market share?
- Develop an overarching ‘definition of good’ that defines the company commercial objectives in one coherent approach and spans all business functions. That might, for example, involve the Sales function temporarily accepting lower volume in the interests of improving the company’s overall margin. Or it could mean the Manufacturing or Supply Chain functions altering their service levels by customer segment, rather than pursuing a one-size-fits-all approach.
- Combine consistency with flexibility. Your commercial strategy needs to be consistent across the whole organisation, whilst at the same time being flexible enough to be locally relevant. This will be critical as different geographies and market segments recover at different speeds, requiring tailored commercial responses.
- Create a living, up-to-date policy document. Your commercial strategy should also be baked into a dynamic, always current, policy document, used by local commercial teams as their ‘rules of the game’ on how best to operate for their segment or customer base.
- Be ready to adapt your products or services according to market needs post crisis. Some industries may see a significant – and permanent – shift in customer and consumer demand for certain products and services, or a widespread acceptance that companies now need to alter their offerings. It’s important therefore to review your current and future product range as part of your overall commercial strategy during the current market interruption.
2. Pricing strategy
What should your business guidelines be in terms of setting prices, discounts, rebates, trade terms and other commercial incentives?
- Align with the commercial strategy. Target/floor prices and margins for products and services should always be consistent with the defined commercial strategy for any given customer segment. They should also be continually reviewed and refreshed in response to shifting to market demand.
- Utilise the framework. Applicable commercial terms guidelines such as discounts, rebates, trade terms, surcharges and so on must be set within the target/floor price and margin corridors and drive the desired customer buying behaviours.
- Deliver a rapid response to individual customer requests. Exceptions to the pricing guidelines will inevitably arise during the sales process and indeed should, if those guidelines are sufficiently rigorous. It’s therefore essential to manage the review and approval of any requested exceptions in a rapid and seamless way to respond to customer demand.
3. Sales/service strategy
Who does your business sell to most effectively and via which channels?
- Regularly review your entire sales process. During a crisis such as the COVID-19 pandemic, the sales process will have been significantly disrupted, including the accuracy of any pipeline predictions. It’s therefore essential to stress test the entire sales process, from annual sales budgeting and planning, through to lead or opportunity management, as well as quoting and sales closure, to ensure it remains accurate and any points of failure are picked up. This is particularly vital for sales coverage and customer treatment models (frequency and method of customer contact), to avoid the cost inefficiencies of over-serving customer segments with different supply and demand balances – or the opportunity costs of under-serving them.
- Stay close to your customers. Ongoing customer relationship management beyond customer sales interactions and customer contract compliance should always be a given – but is now more important than ever. It calls for careful and sensitive handling by sales teams. Attempts to enforce contractual T&Cs with a long-term, valued customer could easily damage the relationship. On the other hand, being flexible enough to introduce, for example, a short-term change in the contract – perhaps on credit or payment terms to deal with cash flow issues – could help both parties and re-enforce relationships for the future. Such measures would, however, need to be eventually reversed to return to commercial normality, to avoid your business being caught in a commercially unattractive ‘new-normal’.
4. Commercial analytics
How do you measure success in your business and continually refresh your commercial strategies?
- Ensure you have a comprehensive analysis of your commercial, pricing and sales strategies. It’s essential to have sufficient analytical capability to understand your current and potential commercial performance, right through to the micro detail, such as customer/SKUs. This should include full revenue, cost and margin transparency from procurement through to sold goods. Only by drilling down to this level can you achieve actionable insights – and managing to the average in a sharply fragmented market is fraught with risk.
- Develop specific sales, service and pricing segmentations. These segmentations should be driven by customer context, need and preference, so that you can define the optimal customer sales and service treatments across all your channels.
- Keep your data up to date. Your analytical toolset needs to be frequently refreshed to reflect any rapid changes in market behaviour. Far-reaching decisions cannot be based on outdated data. In a high transaction load environment, that update may need to be daily or even intra-daily, although for most markets, weekly, and eventually monthly, will be enough.
5. Commercial organisation, skills and incentives
Do you have the right organisational structure – and what steps do you need to take to equip your people and effectively incentivise them?
- Establish a set of end-to-end commercial processes reaching across all functions. Your agreed commercial, pricing and sales strategies need to be underpinned by company-wide commercial processes. These should be integrated across the functions and aligned to organisational structures, with accompanying roles and responsibilities clearly mapped out.
- Include teams beyond the ‘normal’ commercial scope. As well as Marketing, Sales and Finance, the commercial processes also need to cover business functions such as Supply Chain, Manufacturing, Product Development and Innovation and Procurement. All these areas are also affected by commercial decisions and sales volumes, and will benefit from the improved effectiveness of the commercial function. If Procurement is fully part of the loop, for example, it will be far better placed to forward buy the correct supply of product or raw materials, avoiding under or over purchasing. If Manufacturing and Supply Chain are not aligned with the commercial functions, you could find that either cost-to-serve may be too high or face issues such as stock-outs and failed deliveries. That would undermine the sales/service experience, driving customer churn and making future sales more difficult.
- Support your people with cutting-edge training. Operating in a fast-moving and increasingly dynamic way can bring its own stresses. Providing your employees with training in new ways of working in their roles make them feel supported, will drive efficiency and boost morale.
- Create fair, simple and transparent incentive models. Introducing incentive models for the commercial team that reflect new ways of working and dynamic targets will help to drive the right commercial behaviours across your business.
6. Commercial technology and data
Which technology, tools and, above all, data do you need in place to optimise your commercial capabilities?
- Focus on data availability first and foremost. Data is the key enabler. If sufficient transactional, master and cost data is made available, many of the above processes can be supported in the short term through offline tools, regularly refreshed. This will buy you the time needed to fully develop the main IT solutions and sustain this value into the longer term.
- Research the right technologies for your business. Technologies exist that can underpin all of the above requirements. Some are specialist options, such as dedicated pricing or demand planning solutions, while others are more mainstream, such as ERP, CRM and BI. Even if your organisation already has these in place, particularly ERP and reporting solutions, they well may not be set up in a way that enables such a dynamic way of working.
Pulling in the same direction
As we’ve seen, each of these six areas needs to work in concert with the others in a single integrated commercial operating model within your business. If any one area is out of step, it can undermine or destabilise the rest. Optimal prices, for example, cannot be set without the context of the local commercial strategy and cannot be executed in that marketplace unless the sales team follow the guidance given.
Likewise, organisational silos should be linked through effective processes and automated – wherever cost effective – using the right tools and technology. This will help drive efficiency, reduce errors and improve the sales/service customer experience across your organisation.
The value of improving commercial capabilities
Even in normal times, most companies are constantly looking at ways to improve their commercial capabilities. Success in doing so can lead them to up to a 5% EBITDA improvement under normal circumstances. In the abnormal times in which we now find ourselves, however, the value at risk is likely to be significantly higher.
The predominant financial levers needed to achieve this level of benefit are illustrated here:
Typical Commercial Value Tree