Deal with the $$$, Not the Percentage

Emotions and Negociations

There is an emotional being in all of us. There is also a negotiating animal in all of us.

For sure we all had a situation where we asked for a discount just for the purpose to have the satisfaction of getting one. It didn't matter if you got 1% or 10% discount, the fact is that you got one.

As a matter of fact, all good salesman know when they are facing such situation where the customer is asking a discount just for the sake of asking one. In those situations, a salesman says something like: "Ok, I give you $1,000 discount but that is coming from this week's salary". It just connects the negotiating animal with the emotional being inside us, and we close the deal.

Dollars and Percentages

Many times we deal in percentages rather than absolute dollars, euros or yens. You should always deal with absolute amounts rather than percentages. Percentages are what mathematicians call an "calculus instrument". It just serves the purpose of simplify analysis and communication. If you have your sales commission defined in the terms of percentage of the gross revenue, then you don't have to define all possible combinations of commissions for each scenario of gross revenue.

But what does matter to the sales guy is actually the amount of money he brings home.

When negotiating a contract you should always negotiate discounts and translate them in the absolute amount. Even if you are asking in percentage. Only this way you will have the full picture.

Time well spent

You will soon discover that the "3%" you negotiated when you bought your car worths about 15 times the "10%" you negotiated for the insurance of the same car. But you took 1 hour negotiating your car and you took the same hour negotiating the insurance.

Clearly, all percentages don't worth the same. The "car percentage point discount" worths 50 times each "insurance percentage point discount". ( being A the "car %" and B the "insurance %", the equation is 3A = 15 * 10A).

It means that if you spent 1 hour negotiating the car you should only spend at most 4 minutes dealing with the insurance discount.

Sourcing Analysis

Thus, doing a sourcing analysis is critical to decide where to invest your precious time in negotiations. If it is obvious in which products and services you should concentrate ( typically where you spend more money) , less obviously is prioritizing them.

Maybe with Machines you can only achieve 3%, and you are saving $100,000, where with Flower you get a 0,5% but you are saving $500,000.

Doing sensitivity analysis you provide you a means of quantifying the time effort.

And you actually should drop negotiations of low value. Your management time will be better used in something else. If not you can always just negotiate a downsize of your negotiating team.

Buying the Unknown

Many times the SMEs know they need something. But that's it. They don't know what they need.

Let me give you an example: company Beach, who manages a concession in Sunny beach needs to buy chairs for their customers.

The company Beach starts a procurement process for acquiring those chairs with a single phrase: " Please quote 100 white beach chairs for placing them in Sunny beach in 4 weeks". Does this look familiar to you?

The suppliers receive this "RFP" and start asking themselves: "are plastic or metal chairs?", "are adjustable or fixed?", "more durable or less durable?", "in a lease mode?", "support and replacement services?"

The problem is that company Beach doesn't have the know how yet to create a detailed RFP that addresses all those questions. The nearest competitor that has the Turtle beach, near to Sunny beach, is not willing to provide such information, because he is a direct competitor.

So, what to do next?

Call To Action

Find a similar business that it is not a direct competitor to you. Since you are a SME a good option is to find a company that it is geographically away from you. Ask them for help. Sure you will owe them a favor later on, but meanwhile you are better off since you got a good RFP. This type of collaboration will provide insight not only about the RFP but also of the current market prices and conditions.

Rankings -Where to Get Them ?

Ratings and Rankings

We are used already to get ratings for products or for services that available to consumers. We can get ratings for TVs, Hotels and Restaurants or Airliners.

But what about business to business services and products? It becomes much more complex because those products and services are many times tailored to a specific need. You cannot browse the web and get the rating you are looking for.

And the number of ratings is directly connected with the presence of the product. Smaller companies have smaller exposition and it is unlikely that a large group of people talks about their products and services.

The way to pass through this is to use vertical portals. But again usually these portals are destined only for consumers. Have you ever come around a rating for an hotel talking about their conference and meeting services ? No, what you get is ratings about individual rooms and consumer amenities.

SMEs are all alone out there

Small and medium businesses are on their own. Nobody speaks of them and they cannot find rating and rankings of others SMEs. The first issue limits their market exposure and thus limit growth. The second limits their purchase options and decision quality.

For those SMEs to expand rapidly they usually have an outstanding product or service. It has to be far better than the average quality of the products of the bigger players, so that the consumer and other companies decide to opt for that product rather than for the well known brand.

Internet comes to rescue

Collaboration within SMEs (read the older posts) is one of the big problems. But internet offers now a solution. It provides a low cost collaboration structure where SMEs can share their views regarding their suppliers and customers.

By sharing that information you are increasing a common wealth that will serve you in choosing better your suppliers and making more educated decisions about products, risk, price or delivery.

You can see the internet for SMEs as the intranets of the large enterprises, where internal systems for providing ratings for suppliers and customers are already in place.

Electronic Auctions

Electronic auctions are simply wonderful !!!

If there is a negotiating variant that allows to capture immediate gains, electronic auction is the one! No wonder that it is used to sell art or to buy commodities.

Electronic auctions have several direct and indirect benefits:

1. Lower purchase costs. The bidding winner is forced to place another bid to ensure that we continues ahead. The increase competition comes directly from the quickness of the internet. In paper based bids, there is no pratical way to manage dozes or hundreds of bids. By using the electronic auctions we can expect immediate average saving of 5 to 10 percent.

2. Increase purchase speed. The usual process of bidding (email, phone) is slow and it is unstructured. It does not provide a good platform to consolidate bids in a faster way.

3. Solve monopoly, oligopolies (market inefficiencies). Different types of auctions solve different problems.Mixing technology with auctions theory you can break monopolies or oligopolies by using different auctions flavors like American or Japanese.

What it the link between Auctions and the previous post about RFP ?

When entering an auction you must understand that you are not receiving a full blown proposal. Actually what you receive is just, is a vast majority of times, a price. That means you have the heavy load and responsibility of defining precisely the products or services you are purchasing.

That time and effort does pay out. By defining exactly what you need the message is clear across all the tenders. Because the tenders only can bid a short number of variables and cannot bid ad-hoc conditions, they will connect to you to clarify grey areas. That leads to well defined scopes of products and services.

For tenders that means their risk is lowered, because the scope is usually better defined in an electronic auction process. And if the risk is lower, they can do better pricing.

Call to Actions

Select a standard product or service that you company purchase and that is not a core product / service.
For example if you are a car repair shop, you may want to receive bids for telecommunications.

If you are an office law, maybe you want to receive bids regarding insurances.

What Internet can do for your business

Buying is for Consumers, Selling is for Businesses? Wrong !

When we talk about internet opportunities we often think Business to Consumer model. Businesses sell and Consumers buy.

And the B2B transactions actually see Businesses as end users or consumers, where the products or services are pretty much standardized.

Still, the vast majority of purchases made by businesses are very specific. The purchase process usually means creating a RFP (request for proposal) and sending it to a small group of suppliers.

This process means however that are many inefficiencies in the process:

1. Building a RFP - creating and RFP is of critical importance. Too many RFPs are too vague, meaning that during the project phase or delivery phase many details must be negotiated. That leads to increased contract amounts and other hidden costs.

2. Limited competition - by sending the RFP to a limited number of suppliers, the buyer is probably not getting the best service / quote.

3. Unstructured negotiation process - by not creating a RFP framework subsequent purchases events can not be correlated and few conclusions can be made. It is very important that the negotiation process is a structured process that evolves and it is improved over time.

What Internet can do for my company?

The BizNectar.com portal helps you out. By enabling you to connect to different suppliers with only one click and to reuse RFPs you can gradually start implement you procurement and sourcing procedures in a structured way.

By sharing and using RFP templates that are common to a all community you can share some intelligence with others players. Many would say that you are delivering important internal know-how. Actually it is a half empty or half fully type of approach. What you should consider is how much you are getting out of it.

My suggestion is that SMEs should share . The probability that you are sharing some critical information with a direct competing SME is actually very low. Why? Because you are an SME meaning your customers, product and geography base is limited, as the probability of publishing some information that will get used by a direct competitor.

Purchase Synchronization - Second Enemy of SMEs

What is purchase synchronization?

When you buy something, let's say a Coke (or Pepsi, as you wish) , that are two facts: what you are buying and when you are buying. There are many other several facts, but these two hold critical importance.

When you buy your Coke you are doing two important decisions: you decided to buy the Coke at that specific time. The good thing about supermarkets is that you can decide to buy your Coke at any time. But you can even decide for Pepsi, Dr. Pepper, or any other soft drink.

The SMEs (Small and Medium Companies) dilemma

Each company needs to buy stuff, either computers or insurance contracts. Imagine two companies: Travels Inc. and Pizza Inc.. Both need to acquire furniture for their new offices. Travel Inc is opening an office in two months time and Pizza Inc in a one month time. Also, they were looking for desks and chairs.

Now, what is the probability that they choose to buy on the same week and the exact same model of desks and chairs? ZERO. If they are thinking of that, I suggest them also to buy a lottery ticket.

Missed Opportunities

By choosing similar but not exactly the same brand and model, they are missing the opportunities of economies of scale. This is why SMEs are buying core business products at 25% more that large enterprises, and for non core business products they are buying up to 100% more than large enterprises.

Planning the Purchase

By joining forces will other fellows SMEs and planning in advance the purchase, each SME can collaborate with others SMEs to achieve scale.

You may think that at an hypermarket you have all choice in the world. Wrong! You have access to just 50,000 references of about 20,000,000 references out there. The management guys at the hypermarket already limited your choice. Maybe you get the regular Coke, the diet Coke, but you don't get Coke with a twist of lemon.

That relatively low number of references allow the hypermarket to gain scale in each product. If you think of discount food store that the number of references drops from 50,000 to only about 800. Now you don't find the dippers you want, but those at the shelves are 25% at a lower price than those at a hypermarket.

There are no free lunches

What a large enterprise, the choice of desk is limited in the entire enterprise. You can see a large enterprise at a sum of many departments, and each one could resemble a SME. The difference is that you won't find several brands and models of desk. Probably, you may find just two or three different models.

The large enterprise entered in a compromise, and each department or sub unit is much happier saving 45% of the list price for acquiring the desks than with the alternative model with a slightly different color.

The lunch at a SME is an expensive one

The SME are usually owned by a short group of people, I would say that the vast majority of them is owned by 3 or less people. The reason why the partners decided to create an SME is usually to have control of their lives, time and business.

The fact they are in control is the exact the same reason they lost control of the negotiations during a purchase. Many times the partners of Travels Inc. and unwilling to agree on brand and model of desks and chairs with the partners of Pizza Inc.

The price they over pay is basically the price of their liberty. In recession times is many times the price of their bankruptcy.

Call To Actions

Find SMEs that will expectedly buy the same products you need in the reasonable time frame.

This is much easy to say than to do. In tomorrows post I'll suggest a way out.

Time - The first enemy of SMEs

Time and Economies of Scale.

The main problem of SMEs (Small and Medium Companies) I think it's time. Time is that type of resource that is expensive. You may say that you can't buy time. It is not entirely true, you can always hire more employees to do more work and complete it faster.

Let me give you an example. A company with 50 employees when buying 2 new laptops worth a total of 1,000 Eur shouldn't invest more than a couple hours getting the best price. Why? Because each employee hour can cost around 30 Eur. Thus 2 hours are around 60 Eur, or 6% of the total purchase price.

But if you are buying 200 laptops in an organization of 1,000 employees, than 6% is now 6,000 Eur and it is a good choice to spend a few days on it.

SMEs and Sourcing

In short, SMEs don't have time to buy smart. The problem is even greater because large corporations have the time, resources and skills to maximize the value extraction from each SMEs.

SMEs are squeezed by time and large corporations. This is one of reasons why the ratio of net revenue / sales is lower in smaller companies. ( there are others also important like product complexity, market access, etc).

A Call to Action

Each SMEs should join forces to other SMEs in a vast number of products and services that are common to all of them. The investment would not be on a specific product or service acquisition, but on establishing a shared buying department. If some 50 SMEs join altogether in such common service than their joint buying power would be similar to the large corporations.

However, this is easy to say but difficult to implement. Stay tunned for the next post.