Q&A: How to Manage Your Commercial Strategy & Mitigate Risk

We spoke with Mike Mantooth, Director, Capital Projects, at MCi. He is the former Global Contract Manager at United States Steel Corp. As a contract expert, Mike shared his thoughts on the factors and challenges in determining a commercial strategy. He also explained how using TRACK can help companies  determine their commercial strategy and manage risk. 

Q: Before you share your insights on using the right commercial strategy, can you explain why a commercial strategy is needed?  

MIKE: When we talk about commercial strategy, you have to remember our current and future customers have physical sites all around the world performing work in various industrial verticals. They have assets - buildings, sites, and machines that produce these goods. These assets need to be maintained. 

Just because a company is good at making the goods doesn't mean they know how to fix the machinery that produces them. They also may not be able to spare the workforce. 

When a company has to procure services from vendors to maintain its assets, a commercial strategy comes into place. 

Q: What challenges are involved in the process? 

MIKE: It’s a challenge for the two parties – owners and contractors -- to agree on the commercials. In some cases, it involves two Fortune 500 companies coming together to gain common ground who have completely different business models. 

For those two organizations to come together and agree on how they're going to reimburse work for the assets the owners are trying to maintain, it can get precarious. The service contractors are coming into a manufacturing facility that's owned and managed by the owner. 

They don't control any of the variables, such as the environment, atmosphere, time of day, time of week, time of year that they're in there, condition of the equipment that they're working on, or safety requirements that the owner requires. insurance requirements that the owner requires, etc. 

And it's not as simple as saying, "I'll go give you a pipe fitter to fix your pipe for $50.00 an hour," because as a contractor, you don't know how many pipe fitters they're going to need. 

Where's the pipe? How big is the pipe? What are the conditions surrounding the pipe? What kind of insurance requirements do I need to have? What kind of PPE safety equipment do I need to have? What kind of training do I need to have inside the facility? 

Then, they have to get into a negotiation process to figure out commercially how much money to charge to be profitable to come onto a site. 

Q: What is the commercial strategy process? 

MIKE: It's a two-step process. The companies must negotiate the commercials of how they're going to interact with one another, meaning what's required when the vendor comes on-site, what they need to have, when they can work, and how many people they can bring. 

There's a strategy that you pick from the commercials you've negotiated that should be based on the type of work you're doing. So, before you can pick a strategy, you have to define what's being done, or the scope, and that’s a struggle. 

But there’s a conundrum. I need something, but I don't know what I need. I just know the asset is not doing what it's supposed to do. So, I need to hire an expert service contractor to come and fix it. You're not going to have a scope of work because you don't know what to do. So, you're completely reliant upon the contractor coming in and defining your scope of work. 

This puts the owner at a disadvantage. If you don't have enough information to fill out your scope of work, if it's vague or incomplete, or if there are too many unknowns, there's the r-word risk that we introduce into the relationship. If you have the expertise to write a scope, then you have the expertise to choose who would be the best provider. 

Once you identify your scope or define your commercials, then you go to pick your strategy or service. 

Q: Explain more about risk and how it impacts commercial strategy? 

MIKE: Scope identifies your risk. So, your commercial strategy should be picked based on the risk involved in the work. 

Moving on, there are four things we tend to do with risk. 

• Avoid it.
• Ignore it.
• Transfer it.
• Mitigate it. 

Risk is created when you have undefined, vague, or unknown conditions to complete the repair. Some companies have robust planning departments, so they can write scopes of work. If you don't know how to write a scope of work, that's a risk, and the scope will show you that. 

If the owner and contractor would partner to mitigate risk, it would be much better for both parties. It drives the cost of the repair down for both parties. 

But it rarely happens. It's as far up the maturity curve as you can get as an organization. 

We all have limited time, resources, and budgets. Typically, when you go to one of our owner’s sites, their employees are overworked and busy with their lives, so there are so many things that influence the way they do their job.  

Owners don't necessarily wake up full of passion about mitigating risks with the service contractors. They're just trying to maintain safety and keep their head above water. 

Part of the way you mitigate risk is by choosing the right commercial strategy for the work. Because I don't care how well you can write scopes, you will never define every part of the job. You're always going to hit something you didn't know about because there are too many external conditions that owners and contractors can't control. And then you throw in the human element. 

Q: What are the strategy options? Is one better than the other? 

MIKE: There are four predominant strategies in our verticals and markets.

1. Lump sum

2.Time and material 

3. Time and material and not to exceed
4. Fixed fee reimbursable