Deal Financial Management 101

Ted Botzum of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

The only thing that doesn’t change is change. Even before you go live, you can rest assured the environment is different from when the contract was signed. Heck, you know it was outdated when you signed it!

As we all know, a lot of time and effort is spent on understanding the financial value of sourcing contracts (aka “business case”) during the bidding and negotiations process. While this is absolutely required, much of it will be for naught if focus in this area is reduced or removed once the agreement gets inked.

To have a successful program, eliminate surprises and to keep the management of the contract close to what was actually agreed upon, we recommend to our clients and their service providers to put in place clear and unambiguous financial disciplines as soon as possible.

But challenges often emerge when new staff members form the financial management teams for the service providers and their new client organizations. Many come on-board and just continue managing and implementing procedures with which they are “comfortable” and may have worked on other projects or contracts.

While there may be occasions to leverage techniques developed in the past, all contracts are different and deserve the time required to adopt and adapt techniques that fit the terms and conditions of the current contract. Just because Additional Resource Charges and Reduced Resource Credits may have been reconciled at a regional level in “someone else’s contract,” it doesn’t mean that same approach is appropriate on the new deal.

Similarly, if there are 100 sourcing contracts, “projects” may be handled 100 different ways (contractually), and they shouldn’t be expected to be shoehorned into a technique that worked with the project manager’s last customer.

In the end, education is key. The parties should consider jointly developing an education deck on the key economic attributes and major terms that were agreed upon as part of the transition plan. One technique is to develop a few use cases or scenarios depicting the handling of certain situations, such as infrastructure servers, incremental offshoring, bug fixes or minor enhancements.

Some firms like to take a road show approach in which the same band of folks go around and spread a consistent message, address use cases, provide FAQs, etc. While this may be at some cost, it is money well spent as it helps reduce the likelihood of “undesirable behavior,” such as lax payment disciplines, handling of service requests or change controls, or regional/country variations on what is included in the price.

I am sure you know that not all the “Day 1” deal staff is likely to be around on “Day 401” (or Day 101 for that matter). Thus, periodic updates with real life use cases and re-education may also be a wise thing to consider. Make sure you invest time in educating the troops by developing and communicating financial change management techniques that are clear and objective.

There are many other things that can contribute to the demise of a seemingly good deal relating to commercial management. Keep in mind, there was a business case somewhere that was used to justify the agreement that was signed. If you look back a year later, can you honestly say that the right business disciplines were put in place to help maintain the business case value that you expected?

I look forward to hearing some of your war stories about situations where “bad things” happened due to not investing the time up-front to setup the right fiscal education and management disciplines. If you have any, please let us know and tell us how you stopped the hemorrhaging or value leakage from your contract.

Comments

[Theo Botz]

Like Ted says,in essence,"If nothing changes,nothing changes"