Beyond the contract: getting value from incumbent suppliers, part 2
In the second part of our feature on ‘add-on’ sales, poacher-turned-gatekeeper James Johns explores how public sector commercial teams can outmanoeuvre supplier teams and introduce competitive pressures when purchasing from an incumbent contractor
A couple of weeks ago, I wrote an article explaining the calculations made by suppliers when agreeing additional sales through an existing public sector contract, and offered some advice to public commercial teams – picked up during my decades working for suppliers to governments – on how to protect your interests.
That piece covered three essential aspects of buying ‘add-on’ goods and services through an existing contract: putting the provisions in place through the initial contract to facilitate scope change; agreeing and following change control processes; and preparing for contracts’ expiry. In this second article, I want to examine two further topics: the internal pressures within suppliers and how they affect organisations’ behaviour; and the challenge of creating competitive pressures when purchasing from an incumbent supplier.
So, the first – and there’s a straightforward message here.
The better you know your supplier, the more leverage you have.
In any supplier of reasonable size (and doubly-so for listed companies with financial reporting obligations) predictability of financial performance is a hugely important measure. Account managers put significant ongoing effort into forecasting the revenue and profit they will derive from their clients. Moreover, they will be incentivised not only on delivering these numbers, but also on the accuracy with which they forecast.
This creates internal pressures that you, as an intelligent client, should understand and factor into your approach. Knowing your supplier’s financial year and quarter-end dates is contract management 101, and can give you an edge in negotiations. Understanding how much your interlocutors need additional short-term sales to make their quarter or year-end targets further strengthens your hand.
In a sufficiently mature relationship, it would not be unreasonable to engage in an open conversation about what business your supplier is forecasting from you. Suppliers will often trade long-term revenue and margin to meet a short-term shortfall, or may accept a variation in terms that pushes revenue out if their forecast is lighter in later quarters.
The more you understand their goals, the better-equipped you will be to negotiate a deal that meets your own aims. Absent this level of maturity, it’s not completely unprecedented for companies to engineer contract terminations with less valued clients in order to meet a shortfall in revenue or profit: after all, in many cases their clients will need to pay suppliers for a lot of high-margin work to smooth their departure. This might be a pyrrhic victory for the supplier, but in business ‘missing your numbers’ can be a sackable offence. For the individual supplier manager, sometimes it’s best to live to fight another day.
It’s possible to create competitive pressure in a single-tender environment
There are plenty of good reasons for buying additional services from an incumbent supplier, but there are also disadvantages: most obviously, the difficulty of testing the market and securing a competitive deal when you can’t run a full tender process. How can you get a decent deal when the supplier already thinks they’ve won the business?
The most obvious way of applying pressure is through benchmarking. This typically involves an independent expert organisation reviewing the specification demanded by the buyer and the price their supplier has quoted, and providing verification that the price is within accepted norms. It may be sensible to make provision in the master agreement with your supplier for this kind of benchmarking.
However, benchmarking is not an exact science – particularly in government, where the uniqueness of purpose of many organisations can make establishing a proper baseline challenging. If your benchmarking organisation hasn’t previously reviewed similar kinds of projects or services, their findings may be debatable.
Nonetheless, the most likely outcome of a benchmarking exercise is for prices to reduce. In part, this is because benchmarking clauses in contracts tend to specify that the supplier must charge a price at the lower end of the range identified by the benchmarker. In part, it’s because benchmarkers often look at prices from a much wider range of businesses than took part in the original competition, and may factor in productivity savings observed across the industry since the original contract was signed. In part, it’s because benchmarkers are generally commissioned by the client organisation; though they’re often paid by the suppliers, they know who they’re working for – it’s very rare for them to recommend a price increase.
So benchmarking typically produces recommendations for lower prices – and these findings are hard for suppliers to challenge; under some contracts, their implementation may be automatic. As a result, suppliers recognise that benchmarking exercises are likely to work against them, even if their prices are reasonable. And this knowledge can work in clients’ favour: the mere threat of benchmarking may be enough to provide a degree of competitive pressure on a supplier, encouraging them to cut prices.
Taking a more formal route, there can be situations where it’s useful for a buyer to offer a suspension of the contractual provisions which enable benchmarking in exchange for a further price reduction from their supplier. Whilst this may seem counter-intuitive, the benefit to the buyer is that they gain immediate reductions: it’s a ‘bird in the hand’. For suppliers, this arrangement enables them to concede a point they’re likely to have to give way on anyway, in return for surety of income – and they avert the costs and risks of participating in a benchmarking exercise.
How can you know you’re getting a good deal if you can’t leave the shop? James Johns has some answers.
This option should, however, only be used sparingly – particularly when purchasing IT, in which prices typically reduce at a faster rate than other spend categories and can only be properly verified by taking a proper view of the market. You’re best off deploying this tactic only when it suits your needs – for example, if negotiating a short extension to an existing agreement when time is so tight that you’d be hard-pressed to conduct a benchmarking exercise in the remaining term anyway.
You can also look for informal ways of introducing competition to your negotiations. A supplier which is not currently working with you may be prepared to provide a no-obligations price in order to strengthen their chance of unseating an incumbent in the future. This can provide a useful baseline to compare with your existing supplier’s own estimates. Outside of a true competition, though, it is difficult to be sure of the provenance or veracity of an outside bid – so such prices should only be used as a guide.
The last option here is to use your own skills and knowledge to undertake a comparative costing exercise – and as governments develop their in-house technology, commercial and finance functions, their capabilities to do so are growing. If you have multiple incumbent suppliers, you may be able to run an informal procurement exercise between them to create competitive tension. Do take care to remain within procurement law, however, as in some jurisdictions this can leave you open to legal challenge unless both suppliers were appointed through the same initial competition.
In general, the most effective way to bring pressure to bear in these circumstances is to ensure that your supplier believes, first, that you have a good understanding of the current market and of realistic, competitive pricing; and second, that you are both willing and able to choose an alternative supplier, or able to walk away. This is a matter of perception, of course; and you can get a long way down this road using a combination of experience and theatre.
Last words
The days of long-term, monolithic, single-supplier contracts packed with exclusivity clauses are, thankfully, behind us. Increasingly, governments recognise that the innovation and value derived from regular competitions for smaller pieces of work outweigh the administrative cost of running the associated procurements.
Still, there will always be circumstances when asking an incumbent supplier to take on increased scope without further competition is the right thing to do. Experienced buyers need not worry about such situations; in the business world, commercial relationships are routinely conducted along these lines.
For sure, the obligations on buyers may be felt more acutely when you’re spending taxpayers’ money than shareholders’. But in general, businesses tend not to adopt practices which routinely lead to them spending more than they have to. And public bodies procuring goods and services from businesses are operating in the commercial world. So when in Rome, do as the Romans do: just make sure that your centurions and legionaries are well trained, well informed, and equipped for the job in hand.
If you haven’t done so, it’s also worth reading the first article in this series – which covers how to consider additional sales in the initial contract, set up change control processes, and plan for a contract’s expiry.
About James Johns
James Johns is a consultant, strategist and digital policy advisor with more than 28 years' experience helping government organisations to make more effective use of technology. He began his career in the National Health Service and the IT services company Xansa, before spending fifteen years in a range of roles at Hewlett Packard. From 2007 to 2014 he was Director of Strategy for the firm's UK public sector business and more recently was HP's Director of Corporate Affairs for the UK & Ireland. James is a Visiting Senior Research Fellow in the Policy Institute at King's College London and an advisor to the World Economic Forum's National Digital Policy Network.
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