Commercial : Commercial Management: theory and practice defines the role of commercial management within project-oriented organisations, providing a framework for and helping to develop a critical understanding of the factors that influence commercial management practice. It also identifies generic aspects of this practice and provides a theoretical foundation to these activities, by reference to existing and emergent theories and concepts, as well as to relevant management best practice.

The book is structured into four parts: Part 1 Introduction – Commercial Management in Project Environments explores the nature of commercial practice within project- oriented organisations at the buyer-seller interface. It presents a Commercial Management framework, which illustrates the multiple interactions and connections between the purchaser‘s cycle and a supplier‘s bidding and implementation cycles. Additionally, it outlines the principle activities undertaken by the commercial function, identifies the skills and abilities that Commercial support these activities and reviews the theories and concepts that underpin commercial practice. Finally, it identifies areas of commonality of practice with other functions found within project-oriented organisations, plus sources of potential conflict and misunderstanding. Management:

Part 2 – Elements of Commercial Theory and Practice covers commercial leadership; exploring strategy; risk and uncertainty management; financial decision-making; and key legal issues. Part 3 – Approaches to Commercial Practice addresses best theory practice and theory and practice practice management; and commercial and contracting strategies and tactics. Finally, Part 4 – Case Studies offers two extended case studies: Football Stadia (the David Lowe Millennium Stadium, Cardiff; the Emirates Stadium, Islington; and Wembley Stadium, London); and Heathrow Terminal 5.

The book provides a one-stop-shop to the many topics that underpin commercial management practice from both a demand (buy-side) and a supply (sell-side) perspective. It will help develop an understanding of the issues influencing commercial management: leadership, strategy, risk, financial, legal, best practice management and commercial and contracting strategy and tactics.

This book’s companion website is at www.wiley.com/go/lowecommercialmanagement and offers invaluable resources for both students and lecturers: r PowerPoint slides for lecturers on each chapter r Sample exam questions for students to practice r Weblinks to key journals and relevant professional bodies Lowe

bs ISBN 978-1-4051-2468-3 e ite w h

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9 781405 124683 w

9781405124683.indd 1 05/04/2013 09:20

Commercial Management theory and practice

David Lowe Senior Lecturer in Commercial Management Manchester School The University of Manchester

A John Wiley & Sons, Ltd., Publication This edition first published 2013 © 2013 David Lowe Registered Office John Wiley & Sons, Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom. Editorial Offices 9600 Garsington Road, Oxford, OX4 2DQ, United Kingdom. The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom. For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of the author to be identified as the author of this work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. Limit of Liability/Disclaimer of Warranty: While the publisher and author(s) have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. It is sold on the understanding that the publisher is not engaged in rendering professional services and neither the publisher nor the author shall be liable for damages arising herefrom. If professional advice or other expert assistance is required, the services of a competent professional should be sought. All reasonable attempts have been made to contact the owners of copyrighted material used in this book. However, if you are the copyright owner of any source used in this book which is not credited, please notify the Publisher and this will be corrected in any subsequent reprints or new editions. Library of Congress Cataloging-in-Publication Data Commercial management : theory and practice / David Lowe. p. cm. Includes bibliographical references and index. ISBN 978-1-4051-2468-3 (pbk.) 1. Purchasing. 2. Industrial procurement. 3. Contracting out. 4. Public . 5. . I. Lowe, David HF5437.C59 2013 658–dc23 2012037468 A catalogue record for this book is available from the British Library. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, , or other professional services. If professional assistance is required, the services of a competent professional person should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an or Website is referred to in this work as a citation and/ or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Website may provide or recommendations it may make. Further, readers should be aware that Internet Websites listed in this work may have changed or disappeared between when this work was written and when it is read. Cover design by Andy Magee Cover image courtesy of rosevita (www.morguefile.com) Set in 9/11.5pt Avenir by SPi Publisher Services, Pondicherry, India

1 2013 To Ruth, with love and to the memory of Josephine Alice Lowe 1934–2009

Contents

About the Author vii About the Contributors viii Acknowledgements x Preface xii Abbreviations xiv

Part 1: Introduction 1 Introduction: Commercial Management 3

1. commercial Management in Project-Oriented Organisations 23

Part 2: Elements of Commercial Practice and Theory 77 2. commercial Leadership 79 Maria-Christina Stafylarakis

3. Exploring Strategy 96 Irene Roele

4. Perspectives on Managing Risk and Uncertainty 108 Eunice Maytorena

5. financial Decisions 132 Anne Stafford

6. legal Issues in Contracting 173 David Lowe and Edward Davies

Part 3: aPProaches to Commercial Practice 237 7. Best-Practice Management 239

8. commercial Strategies and Tactics 288 Part A: Intent 296 Part B: Deal Creation 332 Part C: Execution 359

v vi Contents

Part 4: case Studies 379 Case Study A: Football Stadia 381

Case Study B: Terminal 5 (T5) Heathrow 455

Index 492

This book’s companion website is at www.wiley.com/go/ lowecommercialmanagement and offers invaluable resources for both students and lecturers:

● PowerPoint slides for lectures on each chapter ● sample exam questions for you to practise ● weblinks (for each chapter and for the whole book) to key journals, and to relevant academic and ­professional bodies About the Author

Dr David Lowe Manchester Business School

David Lowe is a Senior Lecturer in Commercial Management in the Executive Education Centre of Manchester Business School. He is Programme Director for the blended learning MSc in International Commercial and Management and for several executive education programmes in commercial and contract management. Clients include Rolls-Royce, BAE Systems, Thales, BT, the National Skills Academy Nuclear, and the Foundation Trust Network (NHS). David is a Fellow of the Royal Institution of Chartered Surveyors, a Fellow of the Higher Education Academy and an academic adviser to the International Association for Contract and Commercial Management (IACCM). His consultancy work includes benchmarking the engineering and project ­management provision of an international pharmaceutical company. His teaching interests include: commercial management, commercial strategies and tactics, and contract management. Similarly, his research interests focus on commercial and contract management within the context of project-based industries, ranging from ICT/telecommunications to aerospace and defence. Completed research projects include: an investigation of the cost of different procurement systems and the development of a predictive model; a project to assist medium-sized construction companies develop strategic and diversify into new business opportunities offered by public and private sector clients; and an investigation into the function of commercial management in the telecommunications and construction industries. His PhD, completed at UMIST, investigated the development of professional expertise through experiential learning. His book contributions include: ‘Contract management’ in The Wiley Guide to Managing Projects (Wiley, 2004), and Commercial Management of Projects: Defining the Discipline (Blackwell Publishing, 2006) which he edited with Roine Leiringer. The latter is the first book to establish a theoretical framework for ­commercial management.

vii About the Contributors

Edward Davies Visiting Fellow, Manchester Business School/Senior Consultant, Hill Dickinson Edward Davies specialises in the legal and commercial aspects of major infrastructure and engineering projects, with 25 years’ experience in this field. He has been involved in some of the largest and most important projects in the north-west of England including the second runway at Manchester Airport, United Utilities’ multibillion pound procurement programmes and Peel’s £500 million waste-to-energy project at Ince Marshes in Cheshire. Further afield, his international experience includes working in conjunction with CH2M Hill as part of the Panama Canal Authority’s commercial management team for the $5 billion Panama Canal Expansion Project. Prior to joining Hill Dickinson, Edward was a partner at Pinsent Masons for over 20 years and was one of the founding partners of the firm’s Manchester office in 1989. Edward lectures extensively on all aspects of engineering and construction. He is a Visiting Fellow at Manchester Business School and lectures on the MSc in International Commercial and Contract Management and MBA courses. He is also a mediator trained by the American Arbitration Association and CEDR. Edward wrote the chapter on drafting construction contracts in Management of Procurement publi­ shed by Thomas Telford (edited by Denise Bower). He also co-edited Dispute Resolution and in Construction – An International Review published by E&F Spon. In the 2011/2012 edition of the Chambers Guide to the Legal Profession in the UK Edward was rated in the top category of leading construction lawyers in the north-west of England for the 16th consecutive year.

Dr Eunice Maytorena Lecturer in Construction Project Management, Manchester Business School Eunice Maytorena is a lecturer in construction project management at Manchester Business School. She completed her PhD degree at the Bartlett School of Graduate Studies (UCL) in 2003. An architect by training, her work experience includes architectural design and consultancy, research in various aspects of the built environment and lecturing in project management. She has taught on undergraduate, masters and executive MBS programmes. Eunice has worked on several research projects investigating risk percep- tions and in project forms of organisations.

Irene Roele Senior Fellow in Management, Manchester Business School Irene Roele has worked in management, learning and development for over 25 years. For the last four years she has worked for Manchester Business School’s Executive Education Centre as an organisational strategy consultant, researcher and educator primarily in the private sector. She helps individuals and organisations make constructive links between ’thinking’, ’planning’ and ’doing’ – in other words, between theory and practice and between and action. Her specialism is in developing strategic thinking skills. At MBS, Irene takes a leading role in designing and delivering a variety of bespoke executive education and strategy consulting interventions. She regularly runs strategic thinking workshops for a number of ­clients across the private and public sectors. Current work involves facilitating group and individual coaching for senior leadership teams to support their strategy engagement. viii About the Contributors ix

Irene has extensive experience developing and delivering specialist strategy modules on graduate accredited development programmes for MBS, including the MSc in Commercial Management – current clients include Rolls-Royce, BAE Systems, Thales and the Foundation Trust Network (NHS). Prior to MBS, Irene worked at London Metropolitan University in the City of London for 10 years. There she gained extensive experience in postgraduate executive education, including curriculum design, course management and delivery. She was programme leader for the MSc in Financial Service Regulation and Compliance Management, subject leader in Strategy on four executive Masters programmes and module leader for the Chartered Institute of Marketing Postgraduate Diploma. The role included design and deliv- ery of bespoke programmes for various organisations including Standard & Poors, Royal Bank of Scotland, Ernst and Young, BMI General Healthcare Group, the National Trainers Federation and Croydon Social Services. Irene has a BA (honours) from the European Business School, London and an MA in Marketing from Kingston University. Her research interest is in how boards strategise – that is, in exploring the board’s involvement in the strategy-making process.

Dr Anne Stafford Senior Lecturer, Manchester Business School Anne Stafford is a Senior Lecturer at Manchester Business School. Anne worked as a management ­accountant from 1985 to 1990, during which time she qualified as an accountant with the ACCA. In 1990 she was appointed as a Senior Lecturer at the University of Central England, subsequently becoming a Principal Lecturer in 1993. She taught and reporting extensively to a wide range of students, including undergraduate, postgraduate, professional and post-experience programmes. She was Programme Director of the university’s ACCA programmes from 1993 to 1999. In 1999 Anne took a career break and worked part time as a lecturer for UMIST while completing her PhD at the University of Warwick. She was appointed to her current post within the Business School in 2004. Anne’s current teaching and research interests lie in the area of financial reporting, and .

Dr Maria-Christina Stafylarakis Senior Fellow in Leadership, Manchester Business School Maria-Christina Stafylarakis is a Senior Lecturer and Director of Programme Quality in Executive Education at Manchester Business School. She has designed and delivered several bespoke executive programmes and has acted as a dedicated programme director for Halliwells, UNITAS, Sita UK, UKTI and PZ Cussons. Prior to joining MBS, Maria held teaching posts at Hull Business School and at Lancaster University where she lectured on diverse topics such as equal opportunities and diversity, organisational learning/learning organisations, managing change, organisation development, human and develop- ment, leadership and qualitative research methods. She is an AIM scholar (Advanced Institute of Management) and has also worked on various research projects. She has also worked as a training practitioner in Greece with clients such as Ford and SEAT, and has HRD consultancy experience in Vietnam. Maria has a Masters in Human Resource Development (HRD) from the Institute for Development Policy and Management in Manchester and a PhD from Manchester Business School. Her PhD focused on ­leadership in the context of learning organisations Acknowledgements

Author’s acknowledgments I would like to thank Ruth, my wife, for her love, patience and understanding during the long process of writing and editing this book. Similarly, I’d like to express my gratitude to Madeleine Metcalfe, Senior Commissioning Editor, at Wiley-Blackwell, for her encouragement, forbearance and faith that a manuscript would finally be delivered. The book would never have been completed without the participation of Edward Davies, Eunice Maytorena, Irene Roele, Anne Stafford and Maria-Christina Stafylarakis. Thank you all for your chapter con­ tributions, for the many exchanges and the debate we’ve had over the book’s content, and for your inputs to the development of the commercial management programmes at Manchester Business School (MBS). Several people have helped in the preparation of the manuscript: Lesley Gilchrist formatted the draft chapters; Vicki Mansfield drew Figure A.1; and Janine May has protected me from the realities of the ‘day job’, enabling me to eventually complete the project – thank you. I would also like to thank the following colleagues at the University of Manchester: Graham Winch, Mark Winter, Eunice Maytorena and Nuno Gil (members of the Projects and Programmes affinity group at MBS) and Peter Fenn and Margaret Emsley (from the School of Mechanical, Aerospace and Civil Engineering) for their support and encouragement over the years, and Janine May, Emma Farnworth and Helen Jennings for their administrative support and good humour! I would also like to thank the numerous students and delegates who have participated in the various ‘commercial management’ programmes and modules, and the representatives of the sponsoring organisa- tions that have supported and helped develop these programmes. In particular I would like to thank Shan Morris for allowing me to ’plunder’ her MSc dissertation on Insolvency in Construction: The Collapse of Laing Construction plc to produce the case study on the Millennium Stadium, Cardiff. Finally, special thanks are due to Peter Fenn, without whom neither this book nor the commercial pro- grammes that spawned it would have transpired, to Mark Winter for our many discussions on the nature of commercial management, and to Irene Roele for championing the cause of commercial management with MBS’s Executive Development Centre.

Publisher’s acknowledgements We are grateful for permission to reproduce the following copyright material: Table 6.3: EU procurement directives and the corresponding UK regulations, reprinted from European & UK Procurement Regulations, © Millstream Associates Ltd (2012); Table 8.2: Example of an approach to procurement route evaluation, reprinted from Achieving Excellence Guide 6 – Procurement and Con­ tract Strategies, Office of Government Commerce © Crown Copyright (2007). Contains public sector information licensed under the Open Government Licence v1.0 www.nationalarchives.gov.uk/doc/open- government-licence/open-government-licence.htm; Table A.6: Cost breakdown and Table A.7: Break­ down of funding, reprinted from English National Stadium Review: Final Report October 2002, The Stationery Office, © Crown Copyright (2002). Contains public sector information licensed under the Open Government Licence v1.0 www.nationalarchives.gov.uk/doc/open-government-licence/open-government- licence.htm; Box 5.1: Extract from Vinci Annual Report 2011, reprinted from the Vinci 2011 Annual Report, Copyright (2011), with permission from Vinci, Paris, France; Box 5.3: Balfour Beatty balance sheet, Box 5.4: Balfour Beatty plc group income statement, Box 5.5: Balfour Beatty plc group statement of comprehensive x Acknowledgements xi

Income, and Box 5.6: Balfour Beatty cash flow statements, reprinted from the Balfour Beatty Report and Accounts 2010, Copyright (2010), Balfour Beatty plc, London; Box 6.8: EU procurement thresholds, reprinted from European Union (EU) Public Procurement, Intellectual Property Office © Crown Copyright (2012). Contains public sector information licensed under the Open Government Licence v1.0 www.­ nationalarchives.gov.uk/doc/open-government-licence/open-government-licence.htm; and Box B.2: The underlying assumptions of BAA’s contracting approach contrasted with conventional principles (T5 ­contracting assumptions), reprinted from Heathrow’s T5 History in the Making, Sharon Doherty © 2008 John Wiley & Sons Ltd. Image ‘Cardiff Millennium Stadium, May 2006’ p 382 courtesy of Epaunov72; Image ‘Stitched photo of the Emirates Stadium’ p 399 courtesy of Ed g2s; Image ‘Wembley under construction, January 2006’ p 410 courtesy of ProhibitOnions at the wikipedia project; and Image ‘View of the south side of the new terminal 5, July 2006’ p 455 courtesy of Henrik Romby. Photographs in Part 4: Case Studies of the Cardiff Millennium Stadium and Terminal 5 (T5) Heathrow are both licensed under the GNU Free Documentation License. In some cases we have been unable to trace the owners of copyright material, and we would appreciate any information that would enable us to do so. Preface

Definitions of Commercial Management:

‘The management of contractual and commercial issues relating to projects, from project inception to completion’ Lowe and Leiringer (2005, 2006) ‘The identification and development of business opportunities and the profitable management of ­projects and contracts, from inception to completion.’ International Association for Contract and Commercial Management (IACCM)/The Institute of Commercial Management (ICM) (IACCM, ND)

Commercial exists as a distinct management role in many organisations, particularly those emanating from the UK, although it is becoming more accepted globally as a valuable business activity. In particular, ­commercial is increasingly viewed as a dynamic capability within project-oriented organisations. The impact of globalisation, servitisation and collaboration on business-to-business (b2b) exchanges (eco- nomic transactions) has been the formulation and management of complex interfirm contracts, agreements and relationships across the ensuing value networks. The commercial function is primarily responsible for the design, negotiation, award and management of these b2b transactions. The aim of this book is to provide a framework for understanding commercial practice within project- oriented organisations. Additionally, it seeks to identify generic aspects of this practice, to provide a ­theoretical foundation to and common vocabulary for these activities (by reference to existing and emer- gent theories and concepts, for example, transactional cost and relational contracting), and to examine relevant management best practice. The book is divided into four parts:

●● Part 1: Introduction ●●Commercial Management in Project-orientated Organisations: explores the nature of commercial practice within project environments at the buyer–seller interface, and introduces a commercial ­management framework ●● Part 2: Elements of Commercial Practice and Theory ●●Commercial Leadership: explores key themes and concepts from the leadership literature. It reviews established approaches to the study of leadership, for example, trait, style and contingency theories; examines contemporary theories, such as transformational and dispersed leadership; and explores leadership in relation to learning. The chapter concludes with the exposition of a conceptual framework ●●Exploring Strategy: focuses on the orientation aspect of strategy, its aim being to assist commercial practitioners, identify the strategic agenda, define a clear sense of purpose and appreciate the need for a guiding policy for the firm in creating value and clearly articulate its core value-proposition ●●Perspectives on Managing Risk and Uncertainty: provides an introduction to contemporary project risk management, evaluates various perspectives on risk and presents an overview of the project risk management process and its commonly used tools and techniques ●●Financial Decisions: provides an introduction to financial decision making. Its aim is to equip commer­ cial practitioners with the knowledge and ability they need to appreciate the financial information issued by their own organisation, partners, suppliers and customers, and their role in generating this data xii Preface xiii

●●Legal Issues in Contracting: seeks to develop an appreciation of some of the key legal issues that influence commercial practice. It provides a selective overview of contract provisions and procedures, together with an international perspective on the legalisation and regulations that affect b2b exchanges within a project and programmes environment ●● Part 3: Approaches to Commercial Practice ●●Best-Practice Management: identifies and outlines ‘best practice’ in managing projects and ­programmes. Topics covered include governance issues associated with the Turnbull recommenda- tions; the OGC Gateway Process; the use of process protocols, such as PRINCE2, MSP, MoP and MoV; and guidance on best practice in procurement and contract management ●●Commercial Strategies and Tactics: examines commercial practice across the project life cycle from both the supply and demand perspectives, identifying the interrelationship between the demand-side procurement process (cycle) and the supply-side bidding and implementation cycles. The chapter explores how purchasers can articulate their requirements for new asset and services effectively, and then manage the process of asset/service definition and delivery. From the supply side, it addresses how suppliers can identify potential opportunities effectively, develop and communicate their propos- als for the supply of asset and services, manage the deal creation stage, and ensure that commitments made are delivery profitably. It is subdivided into three sections: Part A – Intent; Part B – Deal Creation; Part C – Execution ●● Part 4: Case Studies: Two extended case studies are provided: Case Study A: Football Stadia: comprising­ the Millennium Stadium, Cardiff; the Emirates Stadium, London; and Wembley Stadium, London Case Study B: Terminal 5 (T5) Heathrow

The book is informed by experience gained through developing and delivering undergraduate, post- graduate and executive education programmes in commercial management and research into commercial practice in a variety of industry sectors, including construction, ICT, aerospace and defence. Specifically, it draws on research undertaken at the University of Manchester in support of the MSc in Commercial Management (now renamed the MSc in International Commercial and Contract Management), an MBA for Commercial Executives, and the BSc in Commercial Management and Quantity Surveying. It also builds on Commercial Management of Projects: Defining the Discipline by Lowe with Leiringer (2006). The intended audiences for this book are:

●● Postgraduate students on MSc commercial, contract and project management, quantity surveying and /procurement programmes, and those taking specialist modules on MBA programmes ●● Final-level undergraduate students on quantity surveying, construction management, project management and supply chain management programmes Abbreviations

4Ps Public Private Partnerships Programme ABA American Bar Association ACA Aircraft Carrier Alliance ACA Association of Consulting Architects ACCA Association of Chartered Certified Accountants AEC Achieving Excellence in Construction AHP Analytical hierarchy process AICPA American Institute of Certified Public Accountants AMA American Marketing Association ANN Artificial neural networks APM Association for Project Management ARR Accounting rate of return ASB Accounting Standards Board (UK) ASIC Australian Securities and Investments Commission b2b Business-to-business b2g Business to government BA British Airways plc BAA British Airports Authority Ltd BATNA Best alternative to a negotiated agreement BCIS Building Cost Information Service BERR Department for Business, Enterprise and Regulatory Reform BIM Building information modelling BIS Department for Business, Innovation and Skills BoK Body of knowledge BOO Build–own–operate BOOT Build–own–operate–transfer BPO outsourcing BSF Building Schools for the Future BSI British Standards Institution C&S Civil and structural CAA Civil Aviation Authority CAT Competition Appeal Tribunal CBA Canadian Bar Association CBUK Cleveland Bridge UK Ltd CC Competition Commission CCC Cardiff County Council CCT Compulsory competitive tendering CCTA Central Computer and Telecommunications Agency CA Confidentiality agreement CDA Confidentiality-disclosure agreement CE Constructing Excellence CEDR Centre for Effective Dispute Resolution CFR Cost and freight CIB Construction Industry Board CIF Cost and freight CII Construction Industry Institute of the United States of America CIM Chartered Institute of Marketing xiv Abbreviations xv

CIMA Chartered Institute of Management Accountants CIP Carriage and insurance paid to CIPFA Chartered Institute of Public and Accountancy CIPP Continuous improvement of the project process CIPS Chartered Institute of Purchasing & Supply CLC Colnbrook Logistics Centre CLM Contract life cycle management CMM Capability maturity model/commercial management maturity CoE Centres of excellence CoPS Complex products and services/systems CPT Carriage paid to CRFC Cardiff Rugby Football Club CRM Customer relationship management CRO Chief risk officer CSCMP Council of Supply Chain Management Professionals CSFB Credit Suisse First Boston DAP Delivered at place DARS Defense Acquisition Regulations System DAT Delivered at terminal DCF Defence commercial function DCMS Department for Culture, Media and Sport DDP Delivered duty paid DFARS Defense Federal Acquisition Regulation Supplement DFBO Design-fund-build-operate DoD Department of Defense DoH Department of Health DRO Debt relief order EC European Commission ECC (NEC) Engineering and Construction Contract ECM Enterprise contract management EFA Education Funding Agency EI Emotional intelligence EIRM European Institute of Risk Management ENSDC English National Stadium Development Company Ltd ENST English National Stadium Trust EPC Engineering, procurement and construction ERG Efficiency and Reform Group ERM Enterprise risk management ETO Economic, technical or organisational EU European Union/expected utility EXW Ex works FA Football Association FAR Federal Acquisition Regulations FARS Federal Acquisition Regulations System FAS Free alongside ship FASB Financial Accounting Standards Board FCA Free carrier FIDIC Fédération Internationale des Ingénieurs-Conseils FM Facilities management FOB Free on board FRC Financial Reporting Council FV Future value GMP Guaranteed maximum price GPA Government Procurement Agreement HCC Heathrow Consolidation Centre HS&E Health, safety and environment IACCM International Association for Contract and Commercial Management IASB International Accounting Standards Board IBA International Bar Association xvi Abbreviations

ICAEW Institute of Chartered Accountants in England and Wales ICAI Institute of Chartered Accountants in Ireland ICAS Institute of Chartered Accountants of Scotland ICC International Chamber of Commerce ICE Institution of Civil Engineers ICM Institute of Commercial Management IFAC International Federation of Accountants IFPSM International Federation of Purchasing and Supply Management IFRSs International Financial Reporting Standards IIF Incident and injury free Incoterms® International Commercial terms IRM Institute of Risk Management IP Intellectual property IPMA® International Project Management Association IPO Intellectual Property Office IPR Intellectual property rights IPT Integrated project teams IRM Institute of Risk Management IRR Internal rate of return ISM Institute for Supply Management™ IST Integrated supply team ITIL® IT Infrastructure Library ITT Invitation to tender IVAs Individual voluntary arrangements JCT Joint Contracts Tribunal JV Joint venture KPIs Key performance indicators KSM Key supplier management L&A Liquidated and ascertained (damages) LDA London Development Agency LFA Lottery Funding Agreement LU London Underground M&E Mechanical and electrical M_o_R® Management of Risk MAPE Mean absolute percentage error MBTI Myers–Briggs Type Indicator MEAT Most economically advantageous tender MOD Ministry of Defence MoPTM Management of Portfolios MoV® Management of Value MPA Major Project Authority MS Millennium Stadium MSP® Managing Successful Programmes MVL Members’ voluntary liquidation NAO National Audit Office NATS National Air Traffic Services NCMA National Contract Management Association NDAs Non-disclosure agreements NEC New Engineering Contract NGN Next generation networks NHS National Health Service NJCC National Joint Consultative Committee for Building NPS National Procurement Strategy NPV Net present value NRM New Rules of Measurement OBK O’Brien Krietzberg OFT Office of Fair Trading OGC Office of Government Commerce OH Occupational health Abbreviations xvii

OJEC Official Journal of the European Community OPM3 Organisational Project Management Maturity Model P&L Profit and loss P3M3® Portfolio, Programme and Project Management Maturity Model P3O® Portfolio, Programme and Project Offices PATNA Probable alternative to a negotiated agreement PCM Partnered category management PCP Procuring complex performance PEP Project execution plan PERT Programme evaluation and review technique PESTEL Political, economic, social, technological, environmental and legal PFI Initiative PfS Partnerships for Schools PI Performance indicator PID Project initiation document plc Public limited company PMI Project Management Institute PMM Project management maturity PMO Project management office PPE Property, plant and equipment PPP Public-private partnerships PRINCE2® Projects in Controlled Environments PRM Project risk management PSC Project-specific criteria PSCPs Principal supply chain partners PUK Partnerships UK PV Present value RBS Risk breakdown structures RBV Resource-based view RFP Request for proposal RFQ Request for quotation RFT Request for tender RICS Royal Institution of Chartered Surveyors RM Relationship Management RMIA Risk Management Institution of Australasia Limited ROA Return on assets ROCE Return on capital employed ROI Return on investment RPI Retail Prices Index RR Risk registers SBU Strategic business unit SCM Supply chain management SDR Strategic Defence Review SEC Specialist engineering contractors/US Securities and Exchange Commission SEI Software Engineering Institute SEU Subjective expected utility SIBET Soft issues bid evaluation tool SLA Service-level agreement SMART Specific, measurable, agreed, realistic and timely SPI Smart Procurement Initiative SRA Solicitors Regulation Authority SRM Supplier relationship management SRO Senior responsible owner SSM Soft systems methodology T5 Terminal 5, Heathrow TA Teaming agreement TCE Transaction cost economics TfL Transport for London TRIPS Trade-Related Aspects of Intellectual Property Rights Agreement xviii Abbreviations

TUPE Transfer of an Undertaking (Protection of Employment) UCAS Universities and Colleges Admissions Service (UK) UCC Universal Copyright Convention UNCITRAL United Nations Commission on Law VaR Value-at-risk VfM Value for money VGPB Victorian Government Purchasing Board WATNA Worst alternative to a negotiated agreement WDF World Duty Free WestLB Westdeutsche Landesbank WIPO World Intellectual Property Organization WNSL Wembley National Stadium Limited WRU Welsh Rugby Union WTO World Trade Organisation Part 1 Introduction

Introduction Commercial Management 3 Chapter 1 Commercial Management in Project-Oriented Organisations 23

Introduction Commercial Management

Learning outcomes After reading this introduction you will be able to:

●● Define the terms ‘commercial management’ and ‘commercial manager’ ●● Identify common activities undertaken by commercial managers (practitioners) ●● Describe the position of ‘commercial’ within global, project-oriented organisations Additionally, this introduction seeks to provide an overview of the format and context of the book.

Introduction

Commercial exists as a distinct management role in many organisations, particularly those originating from the UK, although it is becoming more accepted globally as a valuable business activity. Despite this, while a basic internet search will generate numerous job advertisements for commercial managers, executives and directors, academic management literature is decidedly quiet on the subject. Building upon the previous publication Commercial Management of Projects: Defining the Discipline (Lowe with Leiringer, 2006), this text seeks to redress the situation by defining and describing in a normative way, precisely what ‘commercial actors’ (practitioners, managers, specialists, executives, etc.) actually do. It also provides a framework for the application of the principles and underpinning theory that support effective commercial practice.1 Increasingly ‘commercial’ is viewed as a dynamic capability within organisations. The changing nature of business-to-business (b2b) exchanges (economic transactions), resulting from the processes of globalisa- tion, servitisation and collaboration, has necessitated the formulation and management of complex ­inter-firm contracts, agreements and relationships across the resulting value networks. The commercial function within organisations is primarily responsible for the design, negotiation, award and management of these b2b transactions.

What is commercial management?

The terms commercial management and commercial manager have been used for some time, predomi- nantly, but not exclusively, in the following sectors:

●● Telecommunications, electronics and ICT ●● Services and outsourcing

Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

3 4 Introduction

Table I.1 Definitions of commercial management.

Definition Source

The process of controlling or administering the financial Lowe et al. (1997) transactions of an organisation with the primary aim of generating a profit The management of contractual and commercial issues Lowe and Leiringer (2005, 2006) relating to projects, from project inception to completion The identification and development of business opportunities International Association for Contract and the profitable management of projects and contracts, and Commercial Management from inception to completion (IACCM)/The Institute of Commercial Management (ICM) (IACCM, ND)

●● Energy and oil ●● Defence and aerospace ●● Financial services ●● Pharmaceuticals and health care ●● Engineering and construction

Definitions of commercial management Despite its usage in practice, there is no universally acknowledged definition of the term commercial management; although a few suggestions have been proffered. These are presented in Table I.1. Based on an investigation into the role of commercial managers in the UK construction industry, Lowe et al.’s definition focuses on the financial aspects of the function. Their results suggest that within the ­construction supply sector the role was based around ‘looking after’ the profits of an organisation, which entailed minimising its costs and maximising its income, and managing ‘cash flow’. This definition was subsequently modified by Lowe and Leiringer following a study of the commercial role across three, pre- dominantly project/programme-based industry sectors: construction, telecommunications/ICT and defence/ aerospace (Lowe and Leiringer, 2005, 2006). Although not explicitly stated in either definition, both Lowe et al. and Lowe and Leiringer acknowledged the centrality of risk management to commercial management. The definition adopted more recently by the International Association for Contract and Commercial Management (IACCM) and The Institute of Commercial Management (ICM) reflects the application of the term beyond project/programme-oriented organisations and industry sectors, emphasising the function’s involvement in recognising and realising new business opportunities. However, in doing so, the definition is open to criticism: being a rather general delineation of the commercial contribution to an organisation – that is, one that could equally be applied to a more generalist management role. While all three definitions are concise, they each fail perhaps to convey the breadth and multifaceted nature of the function. This is not surprising. The task of framing an appropriate definition that encapsulates all aspects of the role would probably run into several pages and include numerous exclusions and provi- sos. It is also hampered by the use of the term to describe the use or exploitation of natural resources, for example, land (forestry and quarrying), fish stocks (fish farms) or animals (poultry, pigs, etc.). Additionally, in a global context there are issues concerning the use of the word ‘commercial’; for example, the French translate the word as ‘sales’, which has the potential to cause confusion as ‘sales’ is a recognised function within organisations and an established academic discipline.

Definitions of commercial manager Derived from the above definitions of commercial management, two definitions of the term commercial manager have been framed (see Table I.2). However, the reservations expressed in respect of the defini- tions of commercial management, equally apply to these definitions. Introduction: Commercial Management 5

Table I.2 Definitions of commercial manager.

Definition Source

… a person controlling or administering the financial Lowe et al. (1997) transactions of an organisation with the primary aim of generating a profit … is someone whose primary role is in the International Association for Contract and ­management or execution of such opportunities Commercial Management (IACCM)/The Institute or projects2 of Commercial Management (ICM) (IACCM, ND)

Table I.3 Definitions of contract management.

Definition Source

Contract management is a niche within the procurement profession, National Contract Management but it has a very broad perspective in terms of the responsibilities Association (NCMA, 2011) assigned to a contract manager. The job scope ranges from the administrative skills of managing, organizing, and planning, to the excitement and challenge of negotiating a major contract Contract management is the process that enables both parties to a Office of Government contract to meet their obligations in order to deliver the objectives Commerce (OGC, 2002) required from the contract. It also involves building a good working relationship between customer and provider. It continues throughout the life of a contract and involves managing proactively to anticipate future needs as well as reacting to situations that arise Contract management is the process of managing and administrating Public Private Partnerships the … contract from the time it has been agreed at contract award, Programme (4Ps, 2007) through to the end of the service period … Contract management is the phase of the procurement cycle in which OGC (2009) a supplier delivers the required goods or services in accordance with a procuring authority’s specification Ongoing monitoring and management of the provision of services Victorian Government in line with the agreed terms and conditions Purchasing Board (VGPB, 2011)

Definitions of contract management Alternatively, the terms contract management and contract manager have been adopted as descriptors for the ‘commercial’ role in organisations; however, as shown in Table I.3, there is some confusion over the precise meaning of the term contract management. For example, it is often taken to imply a ‘back-room’, administrative, task-orientated or procedural-focused role, and in many organisations the role is restricted to post-award activities in the procurement cycle (those carried out after a contract has been entered into); see, for example, the definitions OGC (2009) and VGPB (2011). In other organisations ‘contract management’ is viewed as a more dynamic capability involving the drafting and negotiation of complex b2b contracts­ and agreements. However, as is evident from the following review of the tasks undertaken by commercial practitioners, while contract management (in its broadest sense) forms a major area of activity, individuals with the title ‘commercial’ rather than ‘contract’ manager generally have a wider sphere of involvement both throughout the project life cycle and in the breadth of activities under their control (for example, relationship and transaction management, and regulatory and financial aspects). Additionally, IACCM have championed the term ‘commitment management’, which they define as:

‘… an advanced method through which an organization applies quality principles to business terms, , practices and processes to drive improvement in negotiation, contract performance and 6 Introduction

­governance standards. It is a systematic way of ensuring that business requirements and capabilities are aligned to formal commitments, to ensure that opportunity selection is optimized and business relation- ships are fulfilled as agreed.’ (IACCM, ND)

The term, however, has failed to gain the same degree of acceptance afforded to commercial and contract management, particularly within the UK context. As mentioned earlier, the term ‘commercial management’ is particularly prevalent in organisations origi- nating in the UK or regional locations that have strong historical ties with the UK. Elsewhere, for example, in the US the term ‘contract management’ is generally used. However, there is some evidence that ‘com- mercial’ is gaining some purchase in the Americas. Interestingly, the principle institution that supports

Table I.4 Common ‘commercial’ activities in project-oriented organisations.

Generally: ●● Identifying and evaluating commercial opportunities ●● Identifying, evaluating and mitigating risk ●● Constructing novel forms of commercial arrangement (agreements and contracts) ●● Reviewing and evaluating agreements and contracts ●● Estimating costs ●● Applying life cycle management (and its various processes and procedures) to commercial and contractual issues ●● Providing commercial input to projects ●● Preparing, reviewing and submitting management reports; auditing projects and undertaking commercial reviews Pre-award ●● Building business cases for business needs or requirements ●● Selecting appropriate procurement strategy(ies) ●● Assessing the costs and risks of a particular venture/opportunity ●● Constructing a business case for a potential deal ●● Dealing with contracts: drafting, negotiating and agreeing complex contracts and agreements ●● Preparing bids; forming part of, or leading bid teams (panels) ●● Owning the bid authorisation procedures3; and providing commercial authorisation ●● Developing and publishing standard terms and conditions of contract for products and/or services ●● Arranging ‘back to back’ subcontract terms to mirror main contract provisions ●● Obtaining legal and regulatory sign-off for undertaking business opportunities Post-award: Managing and administering complex contracts and agreements (post-award contract management): ●● Advising project management teams on contractual issues, providing critical business support to ensure the project is delivered in accordance with the agreed contract terms ●● Managing/administering commercial/contractual issues and initiating correspondence: ●●receiving and processing contractual correspondence: variations and claims, etc. ●●valuing, preparing, submitting, assessing, negotiating and agreeing additional payment (fees) and/or extensions of time in respect of contractual changes (variation) and claims ●●producing and maintaining financial reports and forecasts ●●arranging insurance provisions ●●valuing, preparing, submitting, evaluating and agreeing interim payments and ensuring timely receipt of payment ●● Procuring subcontractors and materials: establishing trading accounts with suppliers and subcontractors ●●managing/administering subcontracts and suppliers ●●receiving and processing subcontract interim payment claims and final accounts ●●liaising with the accounts section to ensure timely payment of monies due to suppliers and subcontractors ●● Valuing, preparing, submitting, assessing, negotiating and agreeing final accounts Introduction: Commercial Management 7 practitioners in this area of practice has assumed the name International Association for Contract and Commercial Management (IACCM),4 an acknowledgement of the duality of terms and interpretations. Within this text, however, the term ‘commercial’ is used.

Commercial management activities Commercial practitioners engage in a wide range of activities; some of these tasks are identified in Table I.4. Lowe and Leringer (2005, 2006) established that, within the construction, telecoms/ICT and defence/ aerospace sectors, the commercial function was generally responsibility for: contract negotiation, contract formulation, risk management, dispute resolution and bidding. They also found that it provided support to other functions with responsibility for: development, sales, performance measurement, estimating, image/reputation management, , supply chain management, supplier evaluation, quality assessment, development appraisal and marketing. The function’s contribution to cost management, price formulation, payments, cost–value reconciliation, subcontracting administration, cash flow management, value management, the creation of outline proposals, acquiring approvals and permits, procurement strategy and claim formulation, was less certain. It was either accountable for these activities or for supporting other functions responsible for carrying out these tasks. As expected, Lowe and Leiringer (2005, 2006) found divergence in practice between industry sectors, for example, commercial practitioners in telecoms/ICT were less likely to be involved in resolving disputes than those from defence/aerospace, while cost management, cost value reconciliation, sub-contracting admin- istration and value management were more likely to form part of the commercial role in construction than telecoms/ICT and defence/aerospace. Further, commercial staff in telecoms/ICT were less likely to be involved in payments, claims formation, cash flow management and estimating than those in construction and defence/aerospace; creating outline proposals, and acquiring approvals and permits were less preva- lent in construction than telecoms/ICT and defence/aerospace; price formulation formed a greater part of the commercial role in defence/aerospace than construction and telecoms/ICT, while commercial actors in defence/aerospace were more involved in procurement strategy than their counterparts in telecoms/ICT. Chapter 1 collates and describes the activities undertaken by commercial practitioners, within project- oriented organisations in more detail. It also presents and explains the following model of the activities, processes, capabilities and knowledge that underpin commercial practice (Figure I.1) Commercial practice, therefore, requires an appreciation of an eclectic mix of academic disciplines and principles, which are applied to the management of projects, programmes and the organisation as a whole.

Context

This text is confined to business-to-business (b2b) relationships; that is, the commercial activities and transactions relating to the purchase and supply of products and services between , rather than for personal use. From this perspective the buyer could be a manufacturer, service provider, consultancy, public sector or third sector (not-for-profit/non-profit-making) organisation, etc. The purchase and supply of products and/or services to public sector organisations can be further categorised as business-to-­ government (b2g) transactions (Chapman, 2004; CIM, 2011). Within this context, this book is restricted to project-oriented organisations.

Project-oriented organisations Although there is no universally accepted definition of the term project, there is general agreement that a project is a temporary endeavour undertaken to generate a unique outcome. Additionally, it can be differen- tiated from other operational activities, by having specific objectives, a novel or distinctive scope of work, unambiguous time, quality and cost parameters and a specific project-oriented organisational form or man- agement structure (Table I.5 lists the most commonly cited definitions). Projects commonly have a recognised life cycle; in the case of a manufacturer of equipment they may comprise the following stages – project 8 Introduction

Relationship management Business Negotiation development

Financial Corporate decisions Activities business role Knowledge Legal, Risk Commercial Environment regulatory and Environment management management governance Processes

Contract Capabilities Project / management programme management

Bid (tender) management Transaction Procurement management

Figure I.1 Model of the activities, processes, capabilities and knowledge that underpin commercial practice.

Table I.5 Definitions of project.

Definition Source

A project is a time and cost constrained operation to realise International Project Management a set of defined deliverables (the scope to fulfil the project’s Association (IPMA) (2006) objectives) up to quality standards and requirements A temporary organisation which is created for the purpose PRINCE2 (2009) of delivering one or more business products according to a specified business case A unique, transient endeavour undertaken to achieve The Association for Project a desired outcome Management (APM) (2010) … unique process, consisting of a set of coordinated and The British Standards Institution controlled activities with start and finish dates, undertaken (BSI) (2000a) to achieve an objective conforming to specific requirements, including constraints of time, cost and resources [BS 6079-2:2000] opportunity, commitment, execution, in-service support, serial production and disposal. A project may be a stand-alone activity or a part of a larger programme (a collection of several interconnecting projects). Frequently, projects are undertaken by multi-firm integrated project teams (IPT). An IPT is both an approach and a set of key capabilities assembled to ensure the delivery of a project and its objectives. Introduction: Commercial Management 9

It incorporates both supply-side participants, such as suppliers, contractors, consultants, specialists and service providers, and the demand-side (customer) project team. Many IPTs co-locate for the duration of the project to facilitate deeper integration; Terminal 5 (T5) Heathrow (Case Study B) is a good example of an IPT. Alternatively, an integrated supply team (IST) is a similar grouping of supply chain organisations but without the integrated involvement of the customer.

Organisational structures Organisational structures can be placed on a pure function/project-based continuum5; Figure I.2 illustrates potential organisational configurations at points along this range. These include:

●● Function-based organisation: a management structure where individual functions in a business – ­dedicated services such as finance, legal and, marketing – are organised into specialist groups or depart- ments. Efficiency of operation is considered to be the principal advantage gained by adopting this form of business structure ●● Function-led matrix organisation: a management configuration where individual projects (contracts) are resourced by the separate business functions, which retain the principal reporting lines to senior management ●● Balanced functional/project matrix organisation6: a management configuration where project and func- tional management have equal status and reporting routes to the organisation’s senior management. The existence of dual reporting lines has the potential to create conflict, dividing an individual’s loyalties and responsibilities between the project team and their functional base. Moreover, there is often a tendency for ‘power’ within a balanced matrix structure to lean towards either the project or function depending upon the strength of personalities, regardless of individuals and the particular circumstances involved ●● Project-led matrix organisation: an arrangement where the main reporting routes to senior management are via the project (director); which is resourced by the various functional groups. Generally, under this model functional representation is maintained at business unit board level through functional directors (see Figure I.3.). ●● Project-based organisation: is where a business’s management structure is configured exclusively around its ethos: managing by projects.7

The key benefits of adopting a project structure are effectiveness and flexibility. In many organisations, however, rather than selecting a single format, which is applied uniformly across the business, a variety of configurations are adopted, depending on the nature of the operations, provision of services, and types of projects, activities and tasks, etc. undertaken by its constituent parts. The term project-oriented organisation has been adopted in this text to reflect this. Additionally, the term project orientation can be used to identify how an organisation coordinates and manages its various projects (portfolios) and also incorporates the drive of an organisation to develop its project management capability.

Examples of ‘commercial’ in project-oriented organisations ‘Commercial’ is predominantly seen as a distinct function in its own right, reporting to a commercial direc- tor (at either the group or business unit level) or alternatively to the Finance Director or General Counsel. In other instances the activity may reside within marketing and sales, , finance, legal and corporate affairs, procurement/purchasing, supply-chain or project/programme management. In BAE Systems, for example, ‘commercial’ is acknowledged as a function and business role – an area of business management, comparable to project management, procurement, and sales and marketing. These areas are distinct from its corporate functions, such as: business development, business improvement, communications, finance, health, safety and environment (HS&E), , information technol- ogy (IT), legal, quality, secretarial and administration. The function encompasses estimating, bidding, negotiating and managing complex contracts. Each business unit has its own commercial director, who reports to the finance director on BAE Systems’ main group board. Similarly, within Rolls-Royce ‘commer­ cial’ is viewed as a specialist area and a function of their business capability, which also includes: customer 10 Introduction

Business unit–Senior executive Business unit–Senior executive A E B B E A C D C D on on on on on on on on on on ti ti ti ti ti ti ti ti ti ti nc nc nc nc nc nc nc nc nc nc Fu Fu Fu Fu Fu Fu Fu Fu Fu Project 1 Fu

Project 2

Project 3

Project 4

Project n

Function-based organisation Function-led matrix organisation

Business unit–Senior executive

Project 1

Project 2 Function A Project 3 Function B Project 4 Function C Project n Function D

Function E

Balanced functional/project matrix organisation

Business unit–Senior executive Business unit–Senior executive ect 1 ect 2 ect n ect ect 3 ect 4 ect ect 2 ect 4 ect ect 3 ect ect 1 ect ect n ect oj oj oj oj oj oj oj oj oj oj Pr Pr Pr Pr Pr Pr Pr Pr Pr Pr Function A

Function B

Function C

Function D

Function E

Project-led matrix organisation Project-based organisation

Figure I.2 Organisational structures.