What does commercial viability mean?
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Let’s talk about commercial viability for your projects.
Commercial viability is something that is considered at pre-project stage. It’s all about proving that it is worth going ahead with the work because the figures make sense. It’s typically related to working with suppliers: your analysis establishes that the relationship is commercially viable, which means you’ll both get something out of it and it is worth the time and effort involved.
A commercially viable deal will be one where the procurement decisions and contract offer the best value to the organisations involved over a time period that makes sense for the deal.
One of the challenges is that what sounds commercially viable today might not be tomorrow, if the market changes, or a supplier goes bust, so it’s important to take a proactive approach and be as risk-aware as possible.
We’re now in the realms that – in my view – stretch outside of a project manager’s remit. As the project manager, it’s unlikely that you’ll be signing the deals or commenting on the financial viability of the partners you are about to start working with. But you can make sure that the right people are involved on both sites.
Here are some things to consider.
What procurement options are available, and have they all been considered? What are the contract terms and is there a break clause? How long are you locked in for and is that acceptable?
What do both sides need out of the deal and what are the requirements?
Where does the risk sit, and if it is with your organisation, is that acceptable? What does the risk profile look like when aggregated across the programme? Do you feel that the supplier is taking too much risk to the point that it might jeopardise their ability to remain commercially competitive?
How and when will payments be made? That can affect the commercial viability of a project because it impacts cash flow. Large payments need to be pre-organised in my experience, so they can made in a timely fashion. What are the payment terms – you might be surprised at how often payment terms are a sticking point for negotiations! We all want the money in our bank for as long as possible…
How will the money spent or earned show up on the books? The accountancy treatment is something that the Finance team will agree. For example, exceptional spend might appear below the bottom line. Some items might be capitalised; others will not. This is out of your control as a project manager, but it gives you confidence to know that someone has considered it and made a definitive choice as to how these things are going to be handled.
Finally, are there any staffing requirements that affect the business case, or the chances of the deal being commercially viable longer term? For example, with the supplier provide staffing, and then when those individuals leave, you have to pick up the resource requirements internally? Build in any costs of handovers, transition planning, a drop in efficiency while new members of the team get up to speed and so on.
All of these discussions take place at various levels, and the summary ends up in the business case before a project is approved. It’s just worth having them on your radar so you can prompt the right people at the right time and get the best possible start for your project.
Posted on: March 02, 2023 08:00 AM |
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Comments (5)
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Stéphane Parent
Self Employed / Semi-retired| Leader Maker
Prince Edward Island, Canada
I remember one of my previous employers was really big on reducing the DSO (Days Sales Outstanding). This could be tricky when your client was a government department, who could negotiate longer payment terms.
Eduard Hernandez
Community Champion
Senior Project Manager| Prothya Biosolutions
Amsterdam, Netherlands
Good points, Elizabeth. Also important to bear in mind whether the project gets some sort of subsidy, especially in R&D.
There are other sort of projects that must be carried out despite a negative impact on the commercial figures (e.g., compliance, law changes, etc.) but that are necessary for enabling the commercial viability of other projects.
Latha Thamma reddi
Sr Product and Portfolio Management (Automation Innovation)| DXC Technology
Mckinney, Tx, USA
Thanks Elizabeth, impressive points.
Latha Thamma reddi
Sr Product and Portfolio Management (Automation Innovation)| DXC Technology
Mckinney, Tx, USA
Very interesting thanks for sharing
Very good insights! Thank you Elizabeth!
Many projects fail after consuming huge resourses, just because a commercial viabillity was not analysed before in the pre-project phase.
Simple tools, like marketing 4 P's, can be deeply discussed by a multidepartmental squad, covering the points mentioned in your article, mitigating risk and reducing failures and saving resources.
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