Inflation and hard times

 Well, if you don't value your Procurement team now, when will you?

And of course your sales team, operational team and in fact everyone in your business.  But just at the moment your Procurement team are really key.

I'm not terribly good at noticing prices in shops (which tells you that I earn enough money to not be worried about every single penny, unlike too many other people).  But even I have noticed prices going up.  And not just by the nominal 10% or so that is the current inflation rate.

MacDonald's have increased the price of their cheeseburger.  But not by 10% but by 20% (from 99p to 119p).  And if you look around the supermarkets you will see they are far from alone.  Lots of products have broken past the psychological £1 barrier, and gone up to £1.20 or more.

Now this may well reflect real changes in supply conditions and the cost of materials.  I don't know.

But what I do know is that we complain more or less the same about a 20p rise as we do a 15p rise, or a 10p rise.

So sensible sales teams will take the approach that, having had prices held back for years by relatively low inflation, and with customers all expecting there will be inflationary increases, the thing to do is go large!

Why have lots of incremental, annoying price rises?  Go for one big one, and hope to get ahead of the game a bit and increase profits in the process.  If inflation is 10%, why not go for 20%.  Or 30%?  If you can't put up prices now, when can you?

And this is where your procurement team comes in.

We know that for manufactured goods the cost of materials is usually about half the overall cost.  So, if inflation is 10%, we should expect to see a 5% rise not 10%.  After all wages have not yet increased by much, so not all costs have gone up.

Of course, industrial prices are rising even faster than domestic prices (15%+) and I am not suggesting that suppliers can hold down prices for ever.

But as a buyer we should be testing and checking.  Understanding our supplier's position, but also expecting that prices will fall equally quickly rather than being a new baseline.  That prices have increased an appropriate amount, rather than more than is necessary.  Making sure suppliers know we are happy to have monthly price negotiations rather than one big rise.  Maybe some kind of quarterly or annual rebalancing as prices vary.  This is the time when we show our value to organisations.

And of course your sales team should be putting up prices.  Yes, that is how inflation rises. But eroding profit margins are not a good idea either.

Yes this does mean that PAWA Consulting fees will be going up to.  Book now to avoid the rush (as they say).

Retention discounts, or the dangers of loss leading bids

I went to a very interesting evening at the University of Bradford School of Management Knowledge Transfer Network, which featured featured Nigel Greenwood of Simply Customer talking about the Customer Journey, and Martin Haley talking about segmentation.

Martin mentioned the old Marketing rule of thumb that it costs 6 times as much to win a customer as to retain one.  And that triggered a few thoughts about procurement.

The costs of bidding for business are considerable, whether it is a formal tender process or a more traditional business to business relationship of meetings and negotiation.  Having won a contract, obviously the business has to perform well in order to retain it, but assuming it does then there is and advantage to both sides if the relationship continues.

My question is whether Procurement think about this sufficiently, and whether we put enough emphasis on squeezing prices in return for extending contracts.  Obviously it saves procurement time and money in avoiding a new bidding process, but there are a few processes going on that we might not think about in sufficient detail.

The cost of sales is obviously shared across all potential customers that suppliers target, but if we are already contracted then the cost of sales to us should be lower.  Perhaps not by a factor of 6, but certainly by 2 or 3.  Do the pries charged during the extension reflect that?

In addition we can think about the well known experience learning curve (or Boston Learning curve) which has been demonstrated back to the days of the Model T Ford.  The more units made, or the more times we carry out a service the more efficient we get.  The relationship is a log-log one, so is commonly portrayed as a curve where every time we double cumulative production the cost per unit goes down by a certain amount.  This obviously does not happen without some effort on the part of the Supplier, but is an indication that longer contracts become particularly attractive to suppliers as set up costs are written off and experience learning reduces the cost of delivery.

Taking this into account, some suppliers will initially submit a loss leading price assuming that profits will come later in the contract.  If we start targeting those savings then the supplier risks making less money than anticipated - hence the phrase that loss leading leads to a loss!

When considering the end of a contract, it is common to more or less roll over the existing price - maybe taking into account variables such as inflation and raw material costs.  Should we be looking instead to have price reductions taking into account the reduced price of sales AND experiential learning. 

There is no such thing as a free lunch, and we might see that initial prices rise if we want to share in the future efficiency savings - but it is something we probably should think about a bit harder.

Basics of Business - Networking

Networking is one of the elements of business that is sometimes taken for granted, but is actually still a source of discussion.  While salespeople, consultants and other snake oil sellers see networking as essential, there are still plenty of people in business who don’t see it as essential.

The arguments against networking are several – that it is time away from the office that should be spent on productive work, that it is expensive, that staff use is as an opportunity to promote themselves rather than the company, that it is entertainment rather than work, that there is no guaranteed benefit, and that it is full of salesmen rather than customers.

 All of these can have some validity  - but if you think that by stopping your staff from networking they will not meet other potential employers, then you are underestimating the work of recruitment consultants.  You are also missing out on a lot of potentially valuable information. 
A couple of anecdotal incidents from the past week or so.  A colleague I met at a networking lunch has just rung me up from the Middle East to tell me about a London based company looking for some training providers. 

Secondly, last week I was at an event where a colleague found out the top management of  a major competitor had resigned en masse to set up their own company.  This is not the sort of information  that  comes out quickly through formal channels, and it means that there are opportunities to take advantage of the distraction of the competition – at a least for a while.  And yes, a potential job vacancy to be considered too.  Without networking it is likely that much of the window of opportunity would have passed by unknown.

If you are going to use networking in your organisation, and I suggest that you should, you should consider a few key points;

-          Set a target number of days for networking – say 2 per month.

             -          Consider what you want out of it - sales leads, market info, ideas, contacts, a new job

-          Ensure information is shared back home - a quick note is enough

-          Practice your Elevator speech - if you have a chance to make a good impression be ready

-          Think about what organisations you want to link into - customers, competitors, suppliers, academia, media

-          Follow up on contacts made – and categorise them with bring forward actions

-          Share – be reciprocal.  People want you to give as well as take

-          Be prepared to cut events that are too full of the wrong sort of people

-          Recognise that events with the right sort of people are limited

-          Recognise that it is a numbers game – there is no guaranteed win on any one event

-          Recognise that it is a long term game - sometimes things take years to lead to business

-          Don’t limit it to your sales people – technical people need networks too

-          Practice networking skills if you are not a natural

-          Don’t be afraid to ask questions such as “who do you use for…?”

-          Be aware of any IP that you want to protect (e.g. who you use for…”

-          Make sure networkers are aware of the need to avoid any activities that could be considered collusion or market fixing (e.g. discussing prices).

-          If you are not getting what you want, then consider other networks rather than stopping networking altogether

-          LinkedIn is great – but it is not an alternative to physical networking.

Procurex - themes

Procurex was its usual success. Thanks to anyone who went to one of my sessions. The last one was on Risk Management, which in the week of the Japanese earthquake was a salutary reminder of the need for contingency planning.

Obviously my perceptions are my own, and I had little time to see the formal presentations but I found three key themes recurring;
- the need to improve the quality of tender submissions
- the tightness of budgets including travel to a free conference
- Category Management

The category Management theme was an interesting one, and talking to Pro5 I think is one that will be taken on from the OGC frameworks by a number of regional government bodies. It is a good and sensible approach, though for the public sector perhaps it cannot be persuded as aggressively as it is by our leading supermarkets.

Business Basics 5: People buy from people

I haven’t seen Geoff for about 10 years, but he still had my contact details through Linked-in and newsletters. He gave me a call because the multi-national he works for is bidding for some business with a major sporting event, and wondered if I would be able to help. In the end nothing came of it, but it illustrates a key point about business – people buy from people. There are pages of consultants on Google, and in the Yellow Pages if anyone still uses that, but people prefer to buy from people that they know personally and have dealt with before. How do you know whom to choose from a long list of names?

There is always a risk when appointing an unknown supplier. Maybe they will exceed expectations and everyone will be delighted. Or maybe they will be terrible. Who knows? At least with existing suppliers you know what their faults are and where the likely problems are going to be, and can try to manage round them.

On a recent project looking at suppliers for major sporting events we asked event organisers what they were looking for, and almost to a man (or woman) they said a relevant track record. When that track record is wedded to a personal relationship the combination is very strong.

So there is always an inbuilt advantage to suppliers already known to the buyer. You might ask whether tendering processes are meant to eliminate that bias, and in principle they should. In practice knowing a supplier gives a least a tiny, unintentional, unconscious weighting to the scoring and might mean a known supplier getting the benefit of the doubt and an extra point or two that makes all the difference if the scoring is close.

On top of that there is the fact that people tend to get along with people who share similar values, styles and experiences. There is a story that Bill Gates made all the guys at Microsoft where shirts and ties the first time they met IBM, just to make them seem more like IBM then all the tie dyed t-shirted code writers they met on the rest of their trip. If he did, it was a brilliant move.

And the more times you meet someone the more you get to know and understand each other. If there is a clash of personalities – then you had better either change your personality or more realistically get someone else to manage that client. It is the approach that we take with one major client where a clash of personalities was a major problem until we worked out the best people to work together and lead the project on both sides.

So, the key message? Get out there and meet your customers. You never know when they are going to have a need and your name will come to mind. Could be tomorrow (wouldn’t that be nice), or it could be in a decade. You don’t know. But if they don’t know you personally, they will probably go with someone they do know.

Business Basics 2 : It's a numbers game

Another truism – the more customers you see, and the more you see your customers, the more successful you are likely to be. Obvious, but for many of us there can be a gap between what we know intellectually and what we believe in our hearts and do as a result. Outside of work life as well as inside.

Of course there is no guarantee that if you get in front of a lot of customers you will win business – your proposition could be so unappealing that no matter how many people you see no one will buy (though people will buy quite remarkable things – do you remember pet rocks?). But whatever your success rate, 99% or 1%, if you see more existing and potential clients more often you are likely to get more business. As said in the book Rainmaking, by Ford Harding, if my success rate is 10% and yours is 20%, I’ll still win more business than you if I see 21 customers and you only see 10.

Salesmen are used to thinking that every rejection moves them closer to a sale – the rest of us are less sanguine. It hurts when a client says no. When times are hard – like they are at the moment – and possible projects are being put on the shelf it takes a strong mental attitude to keep putting yourself in the way of rejection. And of course, when things get better we are all often too busy doing the work in hand to spend too much time seeing people other that existing clients.

As a consultancy we can talk ourselves out of business quite easily – our current project we nearly didn’t bid for on the grounds that the client knew us well but did not invite us in.. Naturally (and wrongly) we thought they did not want us. Another client I saw recently asked why we didn’t bid on a piece of work that was a follow up to an earlier project of ours – the answer was that we did not know about it. Talking more to our clients more often would have avoided both of the those problems.

In industries like Speciality Chemicals, the risks of a new supplier can be high – and so customers want to see consistent commitment to them as an account before taking a chance on change. Other times technical requirements change quite quickly, which an incumbent supplier might not notice but a hungry supplier on the outside might notice and take advantage of. And sometimes you get lucky and call straight after a need for your services has just arisen.

Of course call rate along guarantees nothing, but little and often (and for a long time) can be the way to get business.

The Gathering storm

During a course last week a delegate asked a very interesting question - they often do. Even though we were talking about Supply Chain Management, he was wondering what would happen to sales prices for their company during the much predicted forthcoming economic down turn. He had already described the company as having a unique technology, and so the answer I gave was that prices should be firm but volumes may be doubtful. Their customers may decide not to carry out projects, but if they do carry them out they would have to buy from my delegate's company and though the customers may try to put pressure on prices in reality the choice is buy or don't do the project. A good salesman should be able to resist price pressures in those circumstances - at worst giving away a little to maintain good relationships.

The problem for sellers in a downturn is always discrecenary spend - do we need to buy a new tv, car, shirt? Or can we make the existing one last a little longer? That is where there is real downwards pressure on prices.

An interesting view on this was given by the economist Elizabeth Warren in a speech that I came across in David Hepworth's blog (founder of Word Magazine). It helps to explain why at the end of a long boom we don't feel better off - many of us have a huge personal financial committment, and little discretionary spend. So, we are much more exposed to the consequences of a downturn than previous generations even though materially we are better off.

A long but interesting lecture, even though it is focussed on the American rather than European middle classes.

Hints and tips for writing winning proposals

First, remember that whoever is doing this probably has a lot of bids to read – and a day job to go back to.

1. Be concise – buyers don’t want to have to wade through 2 inches of paper
2. Answer the question – the one asked, not the one you want to answer, or feel they should have asked
a. If you want to answer those as well, but always answer the question as asked
b. If the ITT asks for a day rate give a day rate, not an hourly rate
3. Be clear
4. Don’t be fussy or too ornate
5. Give information in the requested format
6. If you have an alternative proposal include it as well as the requested proposal not instead
7. Include all the documentation requested
8. Look at the scoring mechanism – it will remind you what is important
9. Don’t be afraid to repeat information in different sectons
a. Sometimes proposals are split up, and it makes it easier to read if the information is repeated rather than being told to “see section 10) – remember a happy marker is your friend
10. Don’t let the proposal look like it is a proforma or knocked off by the office junior in their lunchhour
a. Good quality paper, glossy covers help – origami does not

Remember that the buying team can either evaluate bids or answer your questions about when the process will be complete – not both