Posts filed under 'Contract Management'
Success measurements. Most take an aggregated look. Measuring performance over an entire market, an audience, or a population of customers/end-users.
What about on a 1-to-1 basis? That’s how success is achieved, isn’t it?
For example, how well are you doing with that specific customer/end-user? Or that one…or that one…or…
How can success be measured 1-to-1?
Customer Satisfaction Ain’t All It’s Cracked Up to Be
Typically, the burden falls on a single satisfaction score. The happy face survey results.
Customer satisfaction is a feel good measurement and it’s still important. But it’s an attitude, not a behavior.
People will describe how they feel - but their actions may be different. They say they love you, and then do something less than love. Familiar, huh?
Trust is King in the land of 1-to-1
However, if you’re an in-house service provider or outsourced vendor, a good measure of your success is how much you’re trusted.
Isn’t that what you want from customers/end-users? To be more trusted than their alternatives?
How Can You Measure Trust?
Trust can be measured in utilization.
For example, how much your customers/end-users use everything you have to offer. That’s the key: using everything you have to offer.
Think about it. The more customers/end-users trust you - the more they’ll use your services.
Not just the one service they have to because of in-house/contract requirements. But all those other services you’re capable of providing. It’s the 2nd, 3rd, and 4th services that show you’re trusted.
When customers/end-users trust you, they rely on you to help them, to work for them. This goes beyond the usage of the mandated/base contract.
In-House Service Providers
Trust as measured by utilization might be hard to comprehend at first.
If you’re like most in-house service providers your end-users have no choice. They have to use your service, it’s mandated.
But what about all those other services that you COULD offer? Are your end-users coming to you for them? Are they even aware of what else you could do for them?
In addition to your basic service, there are probably 10-20 other services you’re capable of delivering. Any of those associated services, end-users might use, if they know you offer them.
There are even some services farther out there that you might offer. Consider:
- Planning with end-users to get the most from your service
- Liaison with end-users to help them engage service from other providers at outside locations
In-House Service Mission
As a sign of success, using more in-house service may seem counterintuitive. The more your end-users use you, the higher your department’s spend goes.
But that’s what your department is there for. In-house support services enable end-users to focus on their jobs. And its your fellow end-users who are working directly on your company’s survival and success.
So, the more end-users can concentrate on their jobs, and trust you to do more of what you do well, your company wins.
Outsourced Service Vendors
Trust as measured by utilization (aka add-on sales, or share of wallet) is right in your wheelhouse. At least it should be.
Add-on sales to the same customer typically provides:
- Higher profit levels
- Lower cost of customer acquisition (you’re already serving them)
- Faster revenue due to the above
Please tell me you’re measuring share of wallet, along with all those other aggregated measurements.
The Trust Index
Measuring trust is not easy, but not impossible either.
Think of it as an index, a combination of several measurements mashed together. Simply put it only takes 3 steps:
#1 Figure out everything you offer & quantify/price it
#2 Find out what your customer/end-user can use (ask them)
#3 Calculate the percentage they are using of what you offer (%)
Not easy, true. But you can tell the degree to which you’re succeeding with customers/end-users. On a 1-to-1 basis.
How do you determine how much your trusted?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: in-house services, outsource services, trust
August 18th, 2008
No one starts from a blank slate when engaging service. Both the buyer/user and seller/provider come at the engagement with expectations - before the first interaction.
Determining expectations explicitly and fully understanding them is essential to successful engagements.
But it’s rarely done to the degree that’s needed. And when they’re not, lawsuits, red ink, torched reputations and hurt feelings can result.
Looking at Gap 5
In “Gap 5 & Roswell” you’ll find the key driver to service quality is Gap 5, which is from the ServQual model by Zeithaml, Parasuraman & Berry.
Gap 5 is the distance between customers’ expectations and their perceptions. The closer the gap - the higher the service quality. And once engaged, service quality is a big driver to happy business.
Yes, price and product quality count too, but once engaged price is compared to the quality received to see if they match. And product quality isn’t a major driver in services.
Starting a service engagement screams for really understanding those expectations. Before service starts.
Specifications are not Expectations
Specs define “what” is done, sometimes “when” and by “who”. But rarely do specs spell out how exactly the results buyers/users want. Even if they do, there’s a world of different interpretations.
Sellers/providers can work through processes with buyers/users describing their expected outcomes in writing, even by pointing to physical examples to agree on what they’re seeing.
SLAs & KPIs are Not Enough
Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) are great tools and necessary components for determining expectations. But there’s more to it than customer satisfaction and inspection scores.
Understand Communication Preferences
How and when expected information is communicated is also a part of buyers/users expectations.
Sellers/providers must find out how and when buyers/users want to be contacted. And in what circumstances.
Emergency Contact Lists are Not Escalation Protocols
Sellers/providers must get specifics from buyers/users about triggers for communicating incidents in progress. Security services and IT providers typically do this well.
However, all service providers should document a series of common incidents that can happen and find out their buyer/user wants to hear about it and when. Best to work this out during the pre-start up phase of a contract/provider transition.
Asking is a Great Way to Raise Awareness
When sellers/providers ask for these specifics from buyers/users it points out several things, all good:
1) This seller/provider is proactive, process-oriented and experienced enough to deal with more than the incidents - but also to keep their buyer/user in the loop and blood pressure down.
2) The buyer/user gets to think about how they want to work with their seller/provider. As a result the working relationship has a better chance for smooth interactions during tough times.
How do you determine expectations?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: Gap 5, KPIs, ServQual, service expectations, contract services
July 26th, 2008
You manage a budget. You rarely overspend, showing slight, but noticeable savings year after year. You’re a professional manager, say, a Business Owner of an outsourced service.
What if you could end the year with significant savings from budget (>10%) , would you?
Experienced managers typically don’t. And they have good reasons not to. In most organizations there’s a penalty for being too good at saving money.
Budget Remorse
You work hard and come in under budget. During budget season your manager and Finance say “Well, they obviously had too much money for what they needed. We’ll make their next year’s budget that lower amount”.
Save money one year, penalized with less spend the next.
As a result, you’re going to spend all you’ve got this year, so you’ll have the same amount next year. Public agencies (city, county, state and federal) have this down to a fine art.
It still takes skill to stay in budget, but the organization may not get the most value for their spend. And if its a very static, stable spend, the Business Owner can pretty much coast through the year. Again, thinking about some public agencies.
Sandbagging
Of course some Business Owners work to overstate their annual needs during budget season just to create a layer of fat.
Then during the year they generate enough savings to earn their personal bonuses and look good. But organizations miss out on the big wins of real cost savings, because they don’t reward them.
And their bosses, having done the same thing themselves, often catch the Business Owner’s sandbagging when budgets are created.
Not Cashing Out Savings
Savvy Business Owners work around budget remorse and sandbagging by getting more from their budgets. They’ll manage costs downwards and then take those savings from budget and invest them in improvement projects within that year.
One manager told me he looks at a 3-year improvement window and figures out how to get there. Then he takes his under-budget funds and invests them in projects towards that 3-year vision. He gives his organization more value for their budget, and he’s given himself an upwardly mobile career path.
The Variables
Inflation, cost of living, scope change, and industry economics are all variables that require massaging budget and spend to fit.
The above aren’t the only two budget/spend scenarios. As you know, life is about infinite variety. But it’s interesting to think that a management goal, saving costs, should have a built in constraint.
How do you get and give the most for your managed spend?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: budget, budgeting, cost savings, spend management
June 3rd, 2008
Wouldn’t it be great to ask world-class companies about outsourcing, contracting and buying?
Lucky you. Today’s blog gives you the opportunity to do that.
You can ask Microsoft, Yahoo and Expedia about governance, vendor selection, contract management, or procurement.
GUEST INTERVIEWEES
I’ll be interviewing several directors and managers at those companies for upcoming Revenue-IQ articles. You give me your questions, I’ll ask them.
- Senior Director, Strategic Sourcing & Procurement, Expedia Inc.
- Procurement Manager, Microsoft Corporation
- Director, Business & Asset Protection (security), Yahoo! Inc.
RUSH DEADLINE All right, not so rushed
There’s a time crunch for this.
Submit your questions by 1:00 p.m. EST /11:00 a.m. PST this Friday (5/23) here when you can.
HOW TO SUBMIT QUESTIONS
Figure out what you want to ask and post your questions as a comment online here.
See, if you want your questions asked you’ll have to post a comment to this blog. Which isn’t frightening, but probably not something you do often.
Click here for instructions how to.
Or, call me and I’ll walk you through the process over the phone. Ah hah, but here’s the hard part!
I’m not collecting your questions over the phone, or in email. They have to be submitted as comments to this post.
Consider it enforced learning. If you have a question you’d like asked, you’ll post it in a comment. Again, here’s how to.
Go on. Give it a try.
MISCELLANEOUS
Just to state the obvious, practical stuff:
- No guarantee that all questions submitted will be answered
- Questions will have to pass an appropriateness test (can’t ask “wrong” questions, i.e. where they live, what high-school did they go to, etc.)
That’s pretty much it.
~~~~~~
Chris Arlen
President, Service Performance
Technorati: contract management, Expedia, governance, Microsoft, outsourcing, procurement, vendor management, Yahoo
May 21st, 2008
Sack of potatoes <–compared to–> Boeing 787 outsourced components
Commodity <–compared to–> Respected high-priced solution
Basic service <–compared to–> Strategic service
Facility services <–compared to–> IT & Business Process outsourcing
Like you, I’m constantly looking for ways to improve facility service engagements. Such as how to increase value, improve performance and better manage relationships.
Been reading a lot recently.
And there’s a lot written about outsourcing and governance, mainly about Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO).
It’s because ITO and BPO deals are often for millions of dollars over several years. Lot’s of money, lot’s of attention.
What about Facility Services?
Why isn’t there a lot written about facility services? How to improve, increase, manage and govern?
Facility service contracts can be for millions and multiple years too.
There seems to be a lack of respect for facility services’ business contributions. They’re the spinster aunt. Part of the family, but not as interesting as the more glamorous members, such as IT, finance, production, etc.
Large facility service contracts do get eyeballs. They get Procurement’s attention for the initial bid, and then again if contractors fail legal compliance.
But the business owner (the lonely Facility or Property Manager, or Security Director) spends a great deal of time putting out fires and justifying budgets. Not basking in the glow of valued contributor.
It’s about the Connection
I’m guessing facility services have an image problem. Their performance is not connected to their organization’s business success, or survival. Not in a dramatic, compelling way at least.
What’s compelling? Think Department of Homeland Security.
Business owners of facility services know their place. They see it in the size of their budget, access up the executive food chain, and in their personal compensation.
So it’s understandable why business owners may not create or promote that compelling story about their services’ importance.
Can Contractors Help?
That’s where contractors can step in. Who better to articulate the contributions a facility service makes to a business than the provider themselves.
Contractors want to reaffirm their value to business owners. To reconfirm why they were chosen in the first place. And business owners want to validate the contractors contributions and performance.
Well, here’s an opportunity for creating that “better story”. The one that upgrades that facility service’s image within the organization. It only takes connecting business importance to the service.
Isn’t that what contractors present to business owners in contract performance reviews?
Isn’t that what business owners monitor in their contract governance?
When contractors articulate and package that message for their own benefit - business owners can use it upstream. As part of their on-going efforts to raise the organization’s valuation of their contributions.
Dare I say it, but this is a win-win opportunity.
So why aren’t more business owners and contractors promoting the importance of their contributions upstream?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: contract governance, contract performance review, procurement, outsourcing, facility services
May 14th, 2008
This is a drama about outsourcing, procuring and managing contract services.
It’s based on real life. And like a good melodrama, the hero prevails in the last reel.
It was prompted by a conversation this week with the Corporate Director of Procurement for one of the major travel web sites.
Cast of Characters
These are the typical suspects.
Company: A business that outsources non-core services.
Procurement: A company employee who sources, vets, bids and negotiates with Contractors.
Business Owner: A company employee who manages the outsourced service. Goes by the name of Customer sometimes. Confusing, yes.
Contractor: A business that provides outsourced services.
The Storyline
Here’s the overly simplistic storyline. Stay with me for a moment.
- Procurement bids out a service contract.
- Procurement, with input from the Business Owner, selects a Contractor.
- Procurement finalizes a contract with the Contractor.
- Procurement hands over contract responsibility to the Business Owner.
- Contractor performs service.
- The Business Owner observes Contractor’s work and keeps them on track.
- Before the contract renewal date, Procurement rebids service contract.
No Oscar threat here. But it points out…
The Dramatic Conflict - An Unclosed Loop
After the contract hand-off, Procurement doesn’t know what the Company got from the contract.
- Did the Company receive less, or more value than dollars spent?
- Did the Business Owner manage the Contractor relationship well?
- Did the Contractor deliver everything proposed in its bid?
The loop is unclosed because Procurement is unaware of the value received from the contracted service. Procurement doesn’t know how the Contractor performed: were they a star, a wall flower, or an embarrassment? How can Procurement find and select the best Contractors if they don’t see how their choices perform?
The Broken Heart - Lost Opportunities
The unclosed loop means the Company lost on the contract. Lost opportunities may include:
- Not receiving full value for spend - not all of the contractor’s proposal promises delivered
- Procurement not learning from poor Contractor selections - repeating them again and again
- Not correcting deficiencies in the contract when identified - waiting & suffering until rebid to update
- Not reducing liability risk from non-contract compliance - diligence varies between Business Owners & Procurement
The Red Herring - Contract Management
The Business Owner works with the Contractor:
- Observing service delivery
- Catching problems
- Holding the Contractor accountable
- Providing guidance
This is contract management. Necessary, but not governance.
Contract management is a process. It’s about activities, and Procurement doesn’t benefit much seeing daily performance. That’s the Business Owner’s job.
But there is a way to connect the loop and avoid the broken heart of lost opportunities. Read on.
The Hero Prevails - Contract Governance
Contract governance is an event. It’s where performance is validated - officially. It’s done by looking at measurable outcomes - cumulative data.
Now here’s a surprise (or not), governance takes place in Contract Performance Reviews. That’s their real purpose. To look at the contracted outcomes.
And almost every outcome can be measured in some form; cost, quality, reliability, responsiveness, etc. These metrics are KPIs (Key Performance Indicators).
Even feelings are measurable, such as:
- Business Owner’s satisfaction working with the Contractor
- End-users’ satisfaction with the delivered service
- Contractor employees’ satisfaction working at that location
Contract governance closes the loop between Procurement, the Business Owner and the Contractor.
As a result:
- Procurement sees value received (or not) from the contracted service
- Procurement sees how their contractor selection played out - did they make the right or wrong choice, or somewhere in between?
- The Business Owner updates Procurement on their Contractor relationship - a great one can improve the Contractor’s standing with Procurement
Into the Sunset - Value Verified
Contract governance verifies that promised value has been received. With Procurement’s involvement the loop is closed. From bid proposal to performance to verification. Going forward Procurement makes better contractor selections, getting more from less spend. Think bonus.
The Business Owner demonstrates the importance of their service’s contribution. It’s done in terms that can send good news upstream in the Company. Think job security.
The Contractor welcomes contract governance. It makes their work visible in a way that counts - with Procurement, who’ll be rebidding their contract in the future. Think account retention.
Hopeful contractors appreciate Procurement’s fairness. They know the winning contractor will be held accountable to delivering on promises made in the bid process. Think justice.
THE END
So why isn’t contract governance done everywhere, with every contract?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: contract governance, procurement, outsourcing, contract services
May 9th, 2008
Why consider which way you’re stuck? Stuck is stuck, right?
The way you’re stuck matters.
Take a wrong step and you fall off a cliff. Or you wander in wilderness for 40 years. Both unpleasant, but one kind of stuck is felt faster than the other.
Here are 3 types I’ve seen:
- Rimrocked
- Plateaued
- Picassoed
Rimrocked
This is where you’re stuck going up AND can easily go down. Quickly.
Being rimrocked is a precarious and tenuous place.
For contractors, rimrocked sales means nothing significant is coming in. And there’s a strong likelihood several large, anchor contracts may go away. Think rebids.
For contractors, rimrocked profits mean margins are eroding to dangerously thin levels. Your knuckles are getting white holding on.
For customers, rimrocked means not getting improved results when you need them. Could be cost savings, service quality, or customer satisfaction. Insignificant progress towards departmental or company goals means someone’s head will roll.
Plateaued
This is where you can go left or right, forward or backward. But never, never up. Never to the next level.
Being plateaued is not nightmarishly scary. Death comes from atrophy. Your potential, enthusiasm, or career path withers up and dies.
Contractors are plateaued when desired growth is painfully steeper than actual. Or profit is barely acceptable.
Customers are plateaued when not monitoring contractors’ results and actively leading them to the next level. Results are just OK.
Another plateaued sign is when your response to change is “been there, done that” and no action is taken. Start looking overhead for vultures.
Picassoed
This is where you’re trying radically different approaches, quickly one after another. You look busy, feel overwhelmed, but you’re not getting anywhere. You’re stuck.
You know you’re Picassoed when your desk, corkboard, or to-do list look cubist. Like a Picasso painting, seeing everything from many different sides, all at the same time.
Picassoed is more than not knowing where you’re going. It means you don’t know where you are. You’re lost, from too much, too fast.
Getting Unstuck
There probably isn’t one answer to getting unstuck. You’ll need to figure out how to unstick yourself.
But here are some thoughts about these 3 types.
RIMROCKED
- Time is critical
- Quickly scan results (KPIs, revenue, margins)
- Consider something different, unusual
- Look laterally
- Ask employees, contractors, customers for ideas
- Take a small step quickly
PLATEAUED
- Step back - get the bigger picture
- Get an outside perspective
- Assess situation; where you are, have been & want to go
- Focus on strategic direction
- Map out actions from strategy to first step
- Plan success measurements
- Initiate first step
- GPS progress
PICASSOED
- Take time out - slow you’re breathing
- Set time aside for formal planning
- Revisit who you are (core organizational message)
- Road map straight & narrow course towards your aspirational vision
- Restart actions but with one eye on road map
- Course correct only when off the road, minor wabbles OK
What do you do to get unstuck?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: contract sales, contract performance, service improvement, KPIs
April 29th, 2008
I have a friend/client from Kansas.
At least once every time we’re putting together numbers for one of his customers he’ll say “Figures lie and liars figure”.
That Midwest wisdom points out figures (numbers, facts) can tell many different stories.
You choose what you want them to say - then find a figure, or calculation, that gives you that story.
The “Kansas” factor in marketing Turnover Rates
First, the “Kansas” factor refers to honest communication - not comparing the state to how contractors market.
With that out of the way - don’t all service contractors’ brag about their turnover rate?
I don’t know of one that says their turnover is HIGHER than the industry average. That poor industry average is held up for ridicule at 100% to 300%.
If everyone is lower than the average, how come the industry average is so high? Who’s raising it?
Customers would love to have one turnover rate that all service contractors use. They could then compare turnover across contractors and services (i.e. among janitorial, security, engineering, etc.).
But if you’ve bought or sold services for more than 20 minutes you’ll recognize there are a few critical questions surrounding “turnover rates”. Here are mine.
#1 - Is there a universally accepted turnover rate?
There doesn’t appear to be one for the facility service industry.
The one that may have the best chance for being universally accepted is from the U.S. Department of Labor’s Bureau of Labor Statistics (BLS).
It defines Turnover Rate as:
“…the number of total separations for the year divided by average monthly employment for the year (annual turnover).”
You’ll need to multiply this number by 100 to get a percentage. And note that “separations” contains voluntary quits and involuntary separations (contractor terminations), but not layoffs. That makes sense.
#2 - Does that turnover calculation smell funny?
There’s a problem with the BLS formula above.
It doesn’t take into account the stability of other positions.
EXAMPLE:
- Hypothetical XYZ company has only 3 full-time positions
- 2 of those positions are staffed with 10-year employees, no problem here
- The 3rd position has gone through 10 different people in a year
- At year end, the 11th employee has managed to hang on to the job
What’s the turnover rate?
Is it 333%, using the BLS formula listed above?
Or, is it 33%, because only 1 of the 3 positions turned over?
#3 - Is all turnover bad?
Think about the bad egg who has got to go. Or an employee isn’t the right fit for the industry -or has work expectations that don’t match the contractor or customer.
These are involuntary separations. And they count towards contractors’ turnover rate.
Should high turnover rates because of involuntary separation reflect poorly on contractors?
Also, consider this. For customers in economically-challenged markets, high contractor turnover may be necessary, though not desirable. It’s done by losing the higher paid employees.
It keeps costs flat year-on-year. But it also brings service issues related. New contractor employees must learn the facility and can bring more headaches for customers and end-users.
How do you market turnover?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: employee turnover, labor turnover, turnover
April 18th, 2008
A declaration of customer-contractor interdependence.
In the course of history, it becomes necessary to state the separate and equal principles that bind customer and contractor together in commerce.
As business practices evolve, both customer and contractor recognize the need for better results. Both sides want more.
However, adversarial beliefs prevent greater benefits. It’s easier to contract out of habit, or ignorance.
This manifesto is an attempt to improve service contract engagements. By declaring these principles, it’s hoped customers and contractors together will realize more value from their relationships.
PREAMBLE
We hold these truths to be self-evident, that all service contracts are created with certain unalienable principles, that among these are the following:
1. All contracts are relationships.
2. Successful relationships are based on trust. Counter intuitively, trust is earned by first giving it.
3. Contract relationships are made for the exchange of value.
4. Value is mutually beneficial - though not equal. Customers and contractors decide for themselves what’s valuable.
5. Contracts are between companies, but performed by individuals.
6. Individuals respect one another’s challenges and contributions.
7. Contracts document initial expectations, understandings and requirements. But service relationships are elastic. They’re flexibility enables delivery and contributing to goals, while meeting contractual requirements.
8. Because customers select contractors, they have the burden to do so in a fair and transparent manner.
9. Because contractors have been selected, they act as stewards in the best interests of their customers - mitigating risk, lowering costs and improving performance.
10. Customers respect the value of the service contracted. Services are NOT commodities.
11. Contractors respect the uniqueness of each customer’s needs. Customers are NOT the same.
12. Communication is proactive. Strategies, deficiencies and challenges are communicated before they surprise or hurt.
13. Communication is customized to the needs of frequency and situational understanding - hourly, daily, weekly, monthly, quarterly, or annually.
14. Contractors pro-actively and routinely recommend initiatives that lower customers’ costs, improve service and/or quality.
15. Customers incent and reward contractors’ innovation, for continual incremental innovations and/or major changes. Rewards can include longer contracts, more locations, additional services, cash awards, etc.
16. Communication is open - customers share budget, contractors share pricing formulas.
17. Communication is honest and straightforward - both sides sharing the good, the bad, the ugly.
18. Communication is fluid - info that may impact service or results is never withheld or delayed.
19. Success is praised inside organizations, up and down stream - giving equal praise to those who contributed (customer and contractor).
20. Responsibility for problems are publicly and quickly acknowledged - no excuses, but always includes corrective actions, lessons learned and improvements.
21. Customers act as facilitators within their company - removing barriers to contractors’ success.
22. Contractors act as customer advocates within their company - securing resources and commitments.
23. Customers and contractors do what they say they’re going to do when they say they’re going to do it.
24. Customers pre-qualify contractors before contracting services.
25. Customers’ service specifications are current and accurate - incumbent contractors do this in their own best interests to strengthen customer relationships.
26. Customers respect contractors’ investments to pre-qualify and bid contracts by avoiding unrealistic time lines, excessive travel and voluminous, non-contributory informational requests.
27. With a successful contractor track record, customers avoid bidding contracts only to satisfy internal price-checking needs. Alternatives such as market pricing surveys are used, see “Dear Customer…about your RFP“.
28. Cost (contractors’ price) without value is meaningless. When selecting contractors in bid processes, customers rate total cost equal to contractor delivery and service quality. Evidence is verifiable.
29. Customers do not use online reverse auctions for service contracts as they damage customer-contractor relationships, see “Reversing into Darkness“.
30. After contract award, customers verify winning contractors performance and delivery of services as promised in bid selection process.
31. Contractors document service delivery and provide timely reporting to customers.
32. Customers and contractors formally review contract performance reports religiously and regularly (quarterly, twice annually, or annually). Commitment to joint reviews is included in contract.
33. Customers acknowledge contractors right to make a profit above cost and effort expended.
34. Customers work within their company to help contractors receive payment per contract terms.
35. If customers’ employees receive increases for cost of living and benefits, then customers incorporate increases for contractors’ employees into multi-year agreements.
SUMMARY
The Service Contract Manifesto is a vision of what might be. It’s value comes from using as many principles as practical in daily practice.
YOUR TURN
This manifesto is a work in progress. It’s a first draft that will improve with your comments - customer and contractor alike.
Now’s the time to begin entering your comments. Add new principles or offer revisions to those listed. Print out the 8 Easy Steps to Start Posting Comments and get started. No time like the present.
Use the RSS feature to be notified when comments are posted, or bookmark this page and revisit it.
Also, if you’re receiving the monthly article by email, you can also subscribe to the weekly blog. Their different but equally good. Subscribe to the Revenue-IQ weekly blog here.
April 9th, 2008
Continual budget reductions are a pain to customers and contractors alike. Here’s a scenario that’s probably too familiar.
A customer has hired a facility service contractor. A fair market price has been negotiated in a competitive bid process. The first year goes well. Service delivered, everyone’s happy.
>>> 2nd Year
Customer must reduce total spend by 5%. Even though the facility hasn’t decreased, it’s actually added square footage, employees, or both.
Contractor wants to retain the contract. So they squeeze out the 5% reduction. Customer may or may not be aware how it was done. Probably through some combination of:
- Higher productivity from contractor’s familiarity with site(s)
- Reduced benefits and/or wages
- Termination/transfer of higher wage contractor’s employees
- Bringing non-contract projects into lower contract pricing
- Skinnied down profit - if there was any cushion to begin with
>>> 3rd Year
Customer is given the same charter as the 2nd year, another 5% reduction. Again the facility’s service needs have increased in square footage, employees, or both.
But this reduction means the customer is seeking 10% lower spend this year than for the original contract 2 years earlier.
However, over these last 2 years both customer and contractor know:
- Contractor’s labor wages should’ve increased, if they haven’t
- Fuel costs rose significantly
- CPI (Consumer Price Index) compounded more than 6%
Some Industries are Strapped
Being in a hard-pressed industry isn’t an embarrassment - it’s unfortunate.
Telecoms, airlines, some areas of high-tech, retail, and now mortgage banking, know the on-going horror of year-on-year reductions.
Their reductions are to survive, to keep the doors open.
Even if a company isn’t in a volatile industry, it can end up puckered as a lemon pickle because a strategic choice goes wrong.
Things happen.
5 Traditional Reduction Paths
For the customer and contractor in a strapped industry the only answer is…reductions. The question, as always, is “how?”
There are combinations of these, but here are the five major paths:
- Contractors open a vein & retain the contract at a loss - not healthy if it happens
- Contractors reduce price and secretly reduce service - integrity quick sand
- Contractors reduce price by lowering wages, benefits & margins - a slow death
- Contractors are allowed to revise specifications for reductions
- Customers put the contract out to bid - hoping there’s a lower cost contractor out there
4 Reasons Reductions May Be Adversarial
If reducing spend is a fact of life, why is it commonly adversarial? Why can’t contractors reduce price every year?
Although these don’t happen all the time, if there is any unspoken contention between customer and contractor it’s probably due to one or more of the following:
#1 CUSTOMERS FOCUS ONLY ON DOLLARS
Contractors may feel adversarial when customers only look at their dollar spend. They’re missing the value boat by not focusing on what they’re receiving for that spend.
This leads to unrealistic, wishful thinking that contractors’ pricing can go down indefinitely - without a scope reduction.
Yes, innovations occur. But not on a scale of 5-10% annually, year after year.
If customers take only the lowest priced contractor they’ll end up with less than expected, or scoped.
You may have heard of customer horror stories in reverse auctions where the winning price was lower than the direct labor cost - where union states FTEs, hours, wages and benefits. How could a contractor deliver?
#2 LEAN CONTRACTOR MARGINS
Contractors can feel adversarial after a competitive bid process, when their margins are pretty lean.
The typical reductions customers seek, 5-10% per year, are likely not there. Unless contractors work for no profit. And that’s not why they’re in business. Just ask them.
#3 PERCEIVED FAT CONTRACTOR MARGINS
Customers may feel adversarial towards contractors if they believe contractors’ margins are full, fat, and obese.
And there may be contractors with net profits over 20%. But they’re the exception. They’ll soon have market price margins when rebids occur.
However, the majority of contractor margins and pricing are at “market price”, which is why it’s called “market price”.
#4 WE SAID - YOU SAID
Customers and contractors can both feel adversarial when they look at the same situation and see it differently
For instance, contractors may believe customers disregard their need to make a profit. They might think: “After all our hard work, going those extra miles. That’s gratitude for you. All customers want to do is cut my margins”.
Customers also suffer from the same disease.
Customers may believe there’s a whale’s layer of profit that can be reduced drastically. They might think: “Hey, we’re in a tough situation here. Our ship could sink. My contractors can help by emptying some of that profit bucket.”
A 6th Path to Reductions
This 6th path isn’t really new. Top tier customers and contractors already use it. Maybe it’s time for the rest to take a look.
Here it is: Customers work with contractors to reduce costs. Together.
No surprise. But to really do it is unorthodox. It does require courage and commitment. On both sides, customer and contractor.
Take a look at how.
4 Steps on the 6th Path
1st STEP - FULLY DISCLOSING PRICE
In this case, a contractor wishing to revise scope shares their pricing structure with their customer. All direct and indirect costs - full disclosure. Similar to a Cost Plus, or Time & Material format. Download our Pricing Survey form. You can use the format to present pricing information.
Yes, this allows customers to question the amounts, factors, and percentages used.
But contractors know what makes up those numbers. And to get to point #2 it’s a necessary step.
Be ready though. Some customers may challenge those numbers after they’ve been explained to them. Before sharing, contractors must identify the negotiable and non-negotiable numbers. Then diplomatically work through customers’ negotiations.
Again it’s a savvy contractor that explains truthfully, openly, and then takes a stand on non-negotiable numbers.
However, contractors fully disclosing their pricing demonstrates good faith. And most customers will respect the trust given.
You didn’t think there’d be a simple answer, did you?
2nd STEP - REDUCE SPECIFICATIONS
Contractors want to do this with customers. But unless pricing is fully disclosed, customers won’t get the full benefit of the specification change.
It’s a judgment call whether the contractor discloses their pricing first, or the customer commits to working with the contractor before seeing their pricing structure.
However it’s arrived at, customers and contractors must focus on reducing specifications. Together.
The obvious first place to look are specifications that deliver little, or no value. They’re easily axed or revised as needed.
Incumbent contractors will have the greatest insight for how things are and might be.
With specifications reduced, direct operating costs go down, and lower pricing follows.
In full disclosure pricing, customers see how revised specifications impact contractors’ total pricing.
3rd STEP - ALIGN MARGINS TO MARKET
This step will take considerable time and effort. Customers may not have that luxury, so if customers and contractors are OK without it, skip it.
With that said, some customers will be required, or feel obligated, to check their contractors’ margins in the market.
Use a Pricing Survey to accomplish this margin check. This is not a bid, but a survey. For a “how-to” process see “Dear Customer…about your RFP“.
But customers and contractors can’t stop here. They must continue to the next step. Or else bad things happen.
4th STEP - SCALE DOWN EXPECTATIONS
With any reductions in specifications, service will change. And customers’ end-users will notice. So tell ‘em first. Before the changes are implemented.
Together the customer and contractor can raise end-users’ awareness about the new service level. Market the reduction with a positive spin. Ways to announce include:
- Meet & greets with donuts in lobbies
- Posters, fliers or table tents in lunchrooms
- Group email notification, asking for feedback
Lastly, Key Performance Indicators (KPIs) and performance-based contracts need to match the new specifications.
No one would want end-users rating customer satisfaction poorly because the specifications changed, but they didn’t know. Avoid the firestorm. Publicize the change.
How do you thrive in the shrinking spend year-on-year?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: performance based contracts, key performance indicators, KPIs, contract reductions
March 17th, 2008
Previous Posts
