The importance of pricing strategy is highlighted in an article in Industry Week. It suggests many companies fail to strike the right local / global balance and therefore miss profit opportunities.
I always welcome articles on pricing because I think there are far too few of them. But in most cases, I feel they miss the fundamental opportunity that comes from better alignment of price with terms and conditions.
In most companies, prices are established without adequate reference to overall contract terms. This results not only in margin erosion, but also in failure to understand the potential for greater – and distinctive – market segmentation.
The Industry Week article falls into the standard trap. It discusses pricing in terms of country versus global strategies. Yet it misses the point that geography is increasingly less relevant as a basis for segmentation. Towards the end, the author acknowledges “The right level of harmonization will depend on the individual business. For example, a manufacturing company that sells primarily to customers that source globally (e.g. semiconductor manufacturers) needs a high degree of pricing consistency globally, and should therefore be highly centralized with limited local variability. A more regionally-oriented customer base is best served with a less centralized approach, where global processes and tools are harmonized in one model, but also allow local variations.”
The truth is that many businesses today need to cope with far more sophistacted segmentations and they need to find ways to defend price variability within geographic territories. The best way of doing this is by distinctive terms and conditions, reflecting variations in commitment levels, in the allocation of risk and in offering structure. Indeed, the methods and timing of charging will be one of those sources of difference.
Performing on terms and conditions has a major impact on costs, often greater than those associated with the core product. The key to successful pricing (and profit optimization) is to undertake more effective market needs analysis, cutting across traditional segmentation. The problem in most companies is that segmentation is driven more by their organizational model and profit accountability than it is by the customer view or needs. Geographies, business units, product divisions are often the drivers of data that is constrained by their vision and visibility. And these constraints then eliminate alternative strategies.
The sort of questions we should ask include:
- How important is our product to different customer groups; what is its strategic significance?
- How might this impact the levels of responsibility / accountability they would like us to offer?
- What impact might this have on their valuation of accompanying services?
- What implications might these variations have to alternative charging models (eg one-time versus over time; fixed price versus variable or outcome based)?
In a simple example, I recall two contracts for the same data storage system. One system was to manage real-time data for a major stock exchange; the other was for financial reporting within a large international corporation. Both were important, yet represented very different levels of strategic significance. By offering standard product prices (based on their traditional market segmentation), the supplier found itself in tough negotiations with both customers. One was demanding onerous risk terms, far beyond the standard offering; the other was pushing for discounts because it saw limited value in the standard terms. Pricing strategies were driven by product divisions that were in turn measured on geographic performance; such parameters had little relevance to the realities of the market.
Most contract negotiators – at least the good ones – understand their company’s capabilities and seek to structure deals in a way that optimizes benefits for both sides.
But in every deal there are moments when the negotiator knows that they cannot meet the needs of the customer and they are forced to push back and to limit the commitments they make.
In many organizations, that is where the story ends. The deal either gets done or falls apart. There may be some level of post-mortem, but in many cases the unsatisfield issues are forgotten and rarely do they get consolidated to see whether similar problems are being encountered on a regular basis.
In my last blog, Managing Risk Collaboratively, I suggested that smart suppliers would increasingly seek to reduce sources of contention with their customers by proactively addressing their concerns. And according to an article in Channel Insider, that is exactly what IBM are doing through two recent acquisitions. The article observes: “The willingness to invest during tough economic times is smart business and provides a lesson for the broader channel. But you must invest in the right places for the commitment of dollars and resources to make sense. IBM’s two acquisitions make sense because they map directly to hot spots in the market today”.
Importantly for our community, they also suggest that IBM will establish new capabilities that will assist contract performance and in particular address two key areas of supply risk management.
The acquisition of SPSS, according to Channel Insider, results in a new capability in predictive analytics, which “provides foresight that allows customers to operate their businesses more efficiently with spot-on information about behaviors, patterns and trends. Those capabilities add up to cost-savings, more accurate resource allocation, faster ROI and the ability to one-up the competition”. For IBM, this potentially represents far greater effectiveness in its own predictive capabilities, both in customer selection and in the quality of post-award contract and relationship management.
The other acquisition tackles another critical area of supply risk that often arises during negotiations – data security. ‘The Ounce Labs acquisition is notable because it addresses what the industry has talked about for ages as part of the overall security discussion: securing data at the application level. Testing and remediating data security problems during the software development phase, which Ounce’s tools enable you to do, saves money and avoids more serious security implications that could arise once an application is deployed.”
These are two examples of areas where IBM negotiators of the future should be able to demonstrate increased capabilities and where post-award relationships should be improved by proactive identification of problems and their resolution.
As recent interviews with IBM have illustrated, the Contracts organization is closely involved with acquisitions and will therefore be well aware of the potential improvements in contract management that are offered by these two additions to the IBM product portfolio. Rather than fighting customers, they offer further opportunities for collaboration and added value.
Yesterday I hosted a webcast in which Professor Rob Handfield and Vel Dhinagaravel, CEO of Beroe Inc., offered a compelling insight to supply risk and its management. It strikes me that substantive improvements in this important area will occur only when suppliers and customers start to collaborate and build mutuality into their relationships. In this blog I will outline why – and how.
Rob and Vel did a great job highlighting the range of risks and explaining why the financial crisis has brought the topic of supply risk to the top of many organization’s agendas. But they also pointed out the inadequacy of most existing approaches to its management. For example, most companies:
- Lack visibility beyond a few key suppliers
- Do not have access to early warning information
- Rely upon historic data in making supplier selection
A recent study by Aon and State of Flux revealed that only 15% of companies were confident in their knowledge of supplier exposures. But as I listened to Rob and Vel describing the enormity of the task, this finding came as no surprise; indeed, I rather doubt that any company can be fully confident about the quality of its supply risk management.
One major issue is the need for continuous data gathering. While Procurement may often do a good job at initial supplier validation, it is daunting to continue this process on an on-going basis throughout the relationship. For example, suppliers are constantly winning and losing new customers; they are constantly switching their own sources of supply; they are constantly investing or divesting in new product or service lines.
What seems to be forgotten in all of these discussions is the fact that customers are also suppliers. No organization buys things just for fun – they do it to create the capability to deliver goods or services. Reliable suppliers therefore have a vested interest in providing their customers with the data needed to enable risk assessment. Similarly, smart suppliers also want to know how risky their customers are. Failure in a key customer – as shown by the automotive sector – is one of the main reasons for supplier collapse.
If you are not a key supplier or a key customer (in other words, you are readily replaceable) then of course these concerns do not apply – and you must accept that information flows, just like price negotiations, will be relatively one-sided.
Even in those more important relationships, today’s contracting processes tend to be relatively unilateral. While both sides will undertake some form of financial check, the onus otherwise tends to be on the supplier to provide data on insurance, security, disaster recovery, management of pandemics etc. etc. Yet in fact, the data flows must increasingly become mutual; supply partnerships demand that both parties demonstrate their health and their ability to continue meeting obligations.
So in the contract negotiations of the future, I would like to see the development of mutual checklists of information that will be supplied proactively and on an on-going basis. It will be held in confidence and become part of the regular review process between the parties. The goal will be to avoid surprises and enable the reduction of disruptions to either side.
For those companies that do not wish to manage such volumes of data, there are external alternatives, such as the types of service offered by Integrity Interactive, as well as the much wider market analysis offered by Beroe Inc. I will shortly be interviewing executives from Integrity Interactive to explore how their offerings will develop.
Given the importance and the complexity of managing trading relationships in today’s volatile markets, I believe that we will rapidly see much greater balance and maturity in the ways that organizations oversee their continuing alignment. Achieving this efficiently and effectively depends on a readiness by both sides to provide information proactively and to manage risk collaboratively.
Compared with the job losses experienced by many groups in the current recession, the contracts and commercial community appears to be faring quite well. Research by IACCM suggests less than 0.8% of its members have lost their jobs, though of course many others have seen salary impacts, loss of career growth opportunities and reduction in pensions and benefit entitlements.
The market for new jobs has shrunk, but not disappeared. Contract Management is viewed as an increasingly important discipline and there is clear evidence of up-skilling. New contracts groups are being formed and many employers appear willing to fund training and development. Again, IACCM data suggests that organizations are strongly focused on value for money, rather than simple cuts – and for an organization like IACCM, this has resulted in increased demand of more than 40% for its training and skills development services.
But there is no denying that jobs are relatively hard to find – and employers are becoming far more selective. This includes a clear trend to check candidate credentials. They value people who are members of IACCM; they value those with IACCM professional accreditation even more; but they are now assiduous in checking candidate claims.
Candidates evidently understand that professional credentials matter (that is why IACCM is seeing continued membership growth throughout the recession). But beware of making false claims. Twice this week when contacted by employers seeking to validate IACCM membership, we have found their potential employees were not (and never had been) IACCM members. And on another occasion, a member claiming Certified status had never sought to become accredited.
I suspect none of them got the job!
Many times we hear executives talk about ”ease of doing business’. Intuitively, it sounds like an attribute any company should have. And we can probably all think of good examples – especially of those organizations that really make it hard to want to do business with them.
High on my list of ‘hard to do business with’ come mobile phone companies (because of their impenetrable charging formulas and their mostly unhelpful and unempowered call centers). There are others, where for example you are passed from person to person, where no one seems to control anything, where the software systems apparently have no interconnectivity …..
But how does it relate to the world of bids and contracts? What should those in Legal or Contract Management be doing to address ‘ease of doing business?’ IACCM undertook a survey at the end of last year. Its focus was on service-oriented, business to business contracts. The results showed large variations in performance between the companies in the particular market sector that we surveyed. But those who were good at one important characteristic were not necessarily good at all of them. The study also revealed that the size of the legal or contracts organization was significant in determining rankings – but even more important was how and when they were engaged. Excessively large groups did as badly as those organizations with almost no contract resources; in both cases, they caused levels of inefficiency and inflexibility.
The most effective contracts and legal teams were those actively involved in ensuring that corporate policies and practices were aligned with contract commtments – and that the commitments on offer reflected market needs. They were also adept at explaining limits and sought to apply intelligence to the wants and needs of the other side. Not surprisingly, it was one of these groups that commissioned the study!
So how are the firms easier to contract with? The three most common reasons:
- They are more flexible on terms and during negotiations (i.e., prepared to hear-out all perspectives on a given issue before making a decision and willing to accept alternate contract text in the interest of being balanced);
- They understand not only the contract but the business side of the deal as well;
- They are able to establish good relationships with clients. They keep customers’ need in mind and partner with them to best meet those needs.
There were extensive additional comments about the specific companies in the study and IACCM was able to feed back relative rankings on a series of important characteristics. This led several of them to undertake improvement initiatives. Perhaps not surprisingly, those who fared worst are those which today are still talking about making improvements – in other words, the ‘ease of doing business’ gap has widened.
While this particular study applied to supplier characteristics, the attributes are equally relevant on the buy-side. Companies that want to be a ‘customer of choice’ should also consider the characteristics mentioned above – and perhaps undertake similar studies of their relative market positioning.
Anyone wanting to learn more about the study – or perhaps interested in knowing specifics for their industry, including their position relative to competition – should contact Katherine Kawamoto at IACCM (kkawamoto@iaccm.com) .
And if you have particular horror stories that you would like to share, please send them to me – it is always good to hear how bad some organizations can be!
I very much enjoy the daily updates from Pactix – ‘pretty good contract clauses’ – both as a source of excellent insights to legal findings in contract disputes and also for occasional challenging ideas on innovative contract terms. My congratulations to author and IACCM member D.C. Toedt for this great initiative.
Recently I received the following question:
We are looking to apply contract management software to support the full enterprise (procurement, sell-side, operational contracts etc). As we build this vision, we want to identify the benefits and synergies of this approach over standalone system approaches. Are there examples of a similar approach and /or any insight to the benefits achieved?
I sent this question ot IACCM’s Community of Interest for automation. Many replied, expressing their interest in the answers received. It was clear that this is a point of discussion in many organizations. Indeed, although there is clearly a growing understanding of the potential value of contract management automation, the topic still seems fraught with indecision.
Most of the detailed replies came from consultants or providers. They show enthusiasm for the concept of an enterprise-wide solution, but suggest limited traction at this point. Several corporates replied, declaring their intent to roll out cross-enterprise, but indicating that this was work in progress, or had been stalled. Our research suggests that many companies feel in principle that there should be one solution – but are skeptical about whether it can be achieved. It would appear cross-enterprise contract management automation is at present mostly restricted to organizations that are relatively small and / or single geography and / or in industries with high levels of standardization.
After so many years (many of us recall the multi-billion dollar market predicted by Gartner back in 2003), contract management software is still struggling to develop a large and sustainable market. Certainly there were teething difficulties – the struggle to integrate with MS Word, the difficulties of handling ‘the other side’s paper’ – but these have largely been overcome. Yet still many seem unconvinced.
The reasons vary. Certainly one major challenge is the cross-functional nature of a robust solution. Even if the focus is just on buy-side or sell-side contracts, it impacts a wide array of process and policy owners – Legal, Finance, business units, Operations – and often there is no executive sponsor ready to force adoption. This is why many implementations start small and hope to expand; but often they seem to get stuck – or even worse, several competing solutions are adopted.
Another factor is resistance by the IT group. They are increasingly reluctant to accept non-core applications (as they see them) and push for answers that align with other application strategies. That is why the ERP suppliers have often succeeded in derailing acquisition plans, by suggesting that they will ‘imminently’ offer a viable CM module. Recently, this trend has played into the hands of Ariba and other spend management solutions, with their CM offering acting as an extension to the installed application.
Finally, relatively few organizations have yet grasped the significance of the contracting lifecycle. It remains a fragmented process in many corporations, despite the damage this does to trading relationship outcomes. Until executives grasp the importance of building a coherent business process to support contracting capability, it is unlikely that they will drive adoption of a quality technology solution. As a result, we will continue to see a range of tactical implementations and half-hearted answers to operational needs.
Unfortunately for the technology developers, they are often a solution for a problem that many companies do not realize they have. That realization is dawning; the impacts of poor contracting on financial results, corporate reputation, the quality of risk management are becoming more evident. Hopefully those who persevere will soon start to see some more sustainable rewards.
A recent article in the Financial Times has highlighted one of my favorite topics – the fact that ‘few managers take risk into account in creating new offerings’. An Ernst & Young report has highlighted that risk is frequently ignored during product development (I would add to that the fact that it is also mostly ignored throughout the product lifecyle managment process as well).
Of course not all risks are overlooked. But as I speak and work with companies worldwide, I continue to be struck by the absence of structured commercial discipline in bringing products or services to market. In particular, there are very few organizations which ensure careful integration of the product or service with the contract or ‘market promise’. As a result, the terms and conditions sought from suppliers also frequently fail to meet on-going needs, leading either to the inability to make customer commitments, or forcing renegotiation of agreements (often having lost negotiation power).
As we teach in the IACCM ‘body of knowledge’, top performing companies seek to build quality into all their activities – whether manufacturing a product or delivering against a commitment. To win in the market, products and services need to be clothed with terms and conditions that are distinctive (or at least competitive), that reflect policies and practices that are deemed fair and that it consistently honors. Yet remarkably few companies really research what terms and conditions are offered by their competition or would be of value to their customers. Many times products or services are brought to market and retro-fitted with a set of company standards, regardless of whether they make good business sense in the target market.
As a result, market requirements are often either ignored (with what financial consequences, no one really knows), or they are addressed through situational negotiation (again, at what cost in both physical terms and in terms of the risk of non-compliance, no one knows).
The contract and commercial evaluation process should involve a rigorous examination of competitive terms and conditions. It should also be accompanied by market research that would identify customer values. Some of this is usually done – for instance, the nature of warranties (duration, level of coverage, service delivery). But many things are not considered in depth. For example, what value might different market segments place on right of return or trial offerings – and how risky would that be? What value might they place on differential payment terms and how would those be managed? What differences might there be in the strategic importance of the product or service to their business and what might this mean in terms of performance guarantees and their relative value? How might such factors affect the need for maintenance services, or perhaps even spawn an alternative offering? How might product or service updates be handled? What flexibility could be offered over the ability to upgrade or downgrade service levels or volume requirements? How sensitive is delivery and are there ways it could be made more flexible?
All these factors and many more represent items of possible value to customers. But those values are not equal. They represent a source of market segmentation that is rarely used – with the resuylt that we find ourselves either excluded from particular opportunities, or forced into high levels of negotiation. By failing to understand and price these risks and opportunities, we have no idea what revenue is being lost (through missed opportunity or sub-optimal pricing) – or what losses are being incurred (through commitments that are costly to perform).
In my experience, many companies view product development and their commercial market offering as two distinct activities. Their failure to use contracts as a pre-formed and readily available checklist to ensure alignment with selected markets forces them instead to manage risk of product or service failure through terms and conditions that are by their nature inappropriate and risk averse.
As a result, opportunities for market share and revenue are missed; business efficiency is undermined; and companies simply make themselves far too complex to do business with. Building in quality through market alignment is by far the best way to manage risk – and it can be done with less resources and far less pain than today’s fragmented approach to the management of market risk. Simply stop viewing contracts as an operational fall-back for poorly managed risks and start using them instead as a strategic quality control instrument that reduces the probability of the risk occuring.
A survey by the UK’s Institute of Directors reveals that training budgets have largely been protected during the current recession – unlike previous recessions, when they were frequently slashed.
Executive management has driven cost reductions in staffing (mostly through staff reductions, though also in some cases through cutting salaries) and travel and entertainment, but they view investment in skills as an important enabler for economic recovery and competitiveness. They also recognise that, at a time of slary freezes and reductions, investing in training helps the retention of valued employees. As a result, more than 80% have maintained or increased spending on training in the last 6 months.
Managers are increasingly concerned about value for money, however. This has led to less external classes and conferences and a greater focus on mentoring, networking and on-line programs. This reflects IACCM’s worldwide experience, with record numbers signing up for mentored Managed Learning training. The reasons we are told for this surge of interest is that organizations are seeking high quality at lower cost; they want well-defined content that equips individuals and teams to deal with change; and they want global, multi-company perspectives without the expense of physical classes.
Today, with travel budgets slashed and time at such a premium, training programs must adjust to new economic realities. Lengthy on-line packages lack the stimulation needed to drive effective learning, so programs must integrate a variety of techniques, such as on-line content supplemented by student networking, expert-led sessions, simulations and case studies. The fact that budgets have survived should provide the stimulus for the development of more creative forms of learning. With its worldwide network offering such diverse knowledge and opinions, IACCM is well positioned as a leader in these trends.
The survey mirrors IACCM’s experience,
Following on from my last post regarding public sector contracting, the Obama administration initiative creates an opportunity for change. While welcoming the recognition this brings to the importance of contract management, I am concerned that the proposals miss some of the key factors that must underpin improvement.
Major goals of reform should be to address demonstrated weaknesses and develop procedures and practices that meet the needs of today and the future. It is questionable whether these proposals satisfy either of these criteria. IACCM is preparing its comments and welcomes input from all interested parties. The Association is uniquely positioned to offer global, cross-industry and multi-functional perspectives, which are especially important not only for the sake of the US economy, but also due to the effect that reform may have elsewhere.
By Elizabeth Newell enewell@govexec.com June 18, 2009
Industry groups said on Thursday that they generally agree with the principles outlined in President Obama’s March 4 memorandum on contracting reform, but have some concerns about related guidance to be issued by the Office of Management and Budget in September.
During a public meeting hosted by OMB in Washington, contractor associations and other interested parties offered input on increasing competition in procurement, the most beneficial contract types, strengthening the acquisition workforce and determining when it is appropriate to outsource federal jobs. Speakers applauded the Obama administration for making contracting a priority, but urged that change stem from facts rather than perception.
Chris Braddock, senior director of procurement policy at the U.S. Chamber of Commerce, said industry fully supports expanding competition where appropriate, but asked OMB to recognize that sole-source contracting is necessary and helpful in some circumstances. He noted, for instance, that sole-source awards can increase the government’s flexibility and responsiveness in times of crisis.
Alan Chvotkin, senior vice president and counsel for the Professional Services Council, noted the Federal Acquisition Regulation already establishes a preference for fixed-price contracts. Chvotkin suggested that agencies be required to document and share their reasons for choosing any contract type so officials would not feel overburdened if they deemed a cost-type arrangement best for a project.
A number of speakers cited the diminished acquisition workforce as the thread tying together all these issues. Without a strong, well-trained cadre of contracting officers and program managers, agencies are more likely to mismanage any contract type or to cut corners by making sole-source awards, industry leaders said. They unanimously supported the administration’s attempts to strengthen the procurement staff governmentwide.
“We don’t have a single uniform definition of inherently governmental functions and since we don’t know what an inherently governmental function is, I’ve always been amused by how Congress can expect agencies to understand what functions are closely associated with an inherently governmental function,” Chvotkin said.
Discussion moderator Jeff Liebman, executive associate director of OMB, thanked the speakers for coming to the town hall-style meeting and offering their opinions. He urged interested parties to continue to engage with OMB by submitting written comments on Regulations.gov by July 17.
Commitment Matters 