When we negotiate contracts, we expect our commercial models to help us define how parties are to exchange value, estimate price and focus on revenue, cost, risks, and performance so that when using commercial models, we can more clearly define which obligations will remain binding after contract termination or closing.
In short, the question becomes, can we negotiate the contract and survive its post-execution? And, perhaps, within that we might also need to answer:
- Have we planned for flexibility when/if changes occur?
- How will we keep our collaborative relationships strong?
- Have we considered our contract as an opportunity for ongoing partnership management?
Commercial models can be tricky. We know they are expected to secure favorable outcomes at contract awards, but many models fail to deliver sustained value once execution begins, especially in complex, asset‑intensive and service‑driven environments. Value leakage or erosion for example, arises when commercial models are not designed to withstand the realities of contract execution. Other challenges arise often like these:
- Gaps between contract award and contract performance. Commercial success is often measured by favorable pricing, risk transfer, or concessions secured. However, post contract execution exposes certain assumptions that were invisible during the contract negotiation—operational exigencies, supplier interdependencies, imperfect data, and behavioral responses to incentives.
- Pushbacks. When commercial models fail to execute, the usual warning signs are:
- Disputes over scope and compensation
- Incentives that drive unintended behavior
- Escalating change activity and value leakage
- Reversion to transactional behaviors despite collaborative intent
Although such results do not reflect a lack of contracting expertise, they are signals that the commercial model might have been optimized for award, not for delivery. And that’s why execution‑resilient commercial models require a shift in focus from what can be negotiated to what can be executed repeatedly and successively, even under pressure.
FOUR KEY PRINCIPLES
Applying four key principles can help us design commercial models better, ones that maintain resilience, enforceability, and value creation throughout the contract lifecycle.
Principle 1: Risk allocation must be intentional, not implied
Every commercial model embeds a decision about risk. Fixed‑price, time‑based, performance‑based, and outcome‑based structures each distribute risk differently between the parties. Problems arise when risk is shifted implicitly, without corresponding authority, control, or visibility.
Commercial models that survive execution:
- explicitly define which risks are controllable and by whom;
- allocate risk to the party best positioned to manage the risk; and
- avoid compensation structures that force suppliers to recover unmanaged risk through behavior - quality compromise and diminished collaboration.
The key to effective risk allocation is not simply shifting responsibility but making sure that those best equipped to handle risks are held accountable.
Principle 2: Incentives work only when data Is credible
Performance‑based and incentive‑driven models are increasingly popular, yet they are also among the most fragile. Incentives amplify existing conditions—if data quality is strong, they enhance performance; if it is weak, they create conflict.
Execution‑ready incentive models are characterized by:
- clearly defined, operationally measurable performance indicators;
- baselines and targets grounded in credible historical or benchmark data; and
- a clear distinction between performance variability and systemic constraints
Without data readiness, incentives lose legitimacy and become sources of friction rather than value.
Principle 3: Standardization is a control mechanism, not a constraint
Customization is often misconstrued for flexibility. Too much deviation from standard commercial terms increases ambiguity, slows decision‑making, and weakens enforceability.
Commercial models that endure execution:
- standardize core compensation structures and critical terms;
- allow limited, deliberate flexibility tied to genuine operational differences; and
- protect the integrity of the commercial framework across contracts and regions.
Standardization maintains the intended purpose throughout the contract's lifecycle without compromising adaptability.
Principle 4: Governance is part of the commercial model
Commercial models do not end at contract signature, because they are intended to drive behavior. And governance ensures that those behaviors stay aligned. Decision rights, escalation mechanisms, and enforcement processes are integral components of how a commercial model performs in execution.
Resilient commercial models:
- clearly define who can approve commercial changes and under what conditions;
- align governance cadence with operational decision cycles and
- establish accountability for both commercial outcomes and contractual behaviors.
A commercial model without embedded governance is incomplete by design.
Designing for the full contract lifecycle
In conclusion, the most effective commercial models do not extract maximum leverage at award. Instead, they remain stable, fair, and enforceable throughout execution. Designing for execution requires discipline—clear risk placement, data‑backed incentives, standardized structures, and embedded governance.
Organizations that adopt this approach move beyond transactional contracting toward sustained value creation, where commercial models do not merely survive execution, but actively enable it.
ABOUT THE AUTHOR
Doyinsola Aregbesola is a supply chain professional with over 16 years of experience in strategic sourcing, contracts, category management, regulatory compliance, and commercial leadership across various supply chain service portfolios. She is recognized for developing and executing fit-for-purpose category strategies, structuring effective commercial models, and leading supplier engagement to deliver value, manage risk, and support operational execution. Doyinsola is also known for her ability to align stakeholders and is dedicated to achieving excellence in contract management, which facilitates disciplined decision-making and sustainable performance within complex, high-value environments.
REFERENCES
World Commerce & Contracting, Contract and commercial management (CCM): The journey to operational excellence, WorldCC, 2023.
World Commerce & Contracting and Ironclad, Closing the procurement value gap, WorldCC–Ironclad Joint Publication, 2022.
World Commerce & Contracting and Sirion, Navigating uncertainty through CCM resilience, WorldCC–Sirion Joint Industry Report 2023.
KPMG, Disrupting the contract management paradigm, KPMG International, 2022.
KPMG, Disrupting the contract management paradigm, KPMG International, 2022.