How Service Based Companies Increase Profit Part 2: How to Defend Against Them

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If you haven’t had the chance – read (Part 1 – How Services Based Companies increase Profit) regarding top tactics service companies use to increase profits. This article is intended to address these common issues using negotiation tactics to ensure profits stay reasonable. I won’t ever ask you to work for free, but you sure as hell shouldn’t be driving a Lamborghini to work!

 

I will caveat this entire argument by saying I tend to stray away from hardball tactics. In my tenure, I’ve only found them to be needed if you are working with a sole source /single source supplier or someone who believes their product is (IT products come to mind). And even then, what type of relationship are you really starting if you each can’t compromise to make the terms mutually beneficial? If you have a solid analysis to provide on the proposal, negotiations are a much easier conversation. As I always like to say – numbers don’t lie but people do!

 

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Time (Rate + Hours)

As with any negotiation, the more you know the better position you are in. With Time as the first category, there are three components you will need to focus on: Rate, Hours and Staffing Level. If you can get the break-out of these components you can address the majority of the issues from lumping costs together to assessing proper staffing levels (senior vs. junior team, inflated titles) and hours spent.

If a business partner gives me a scope of work/proposal with a total cost, I can only give you a comparison of if it’s high or low. There isn’t much else we can do, and you really don’t know what you are getting for your money.

Tactic #1 – Force the business to give you the detail and breakout of the project and standardize it for comparison. Make sure all three components are included (staffing levels or titles with corresponding rate and hours – see below for an example).

 

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Side Note: If you are working specifically around Marketing Agencies there are tools – RightSpend,  which is industry wide or Wanamaker for Pharma. companies only,  that can provide this level of analysis for you with a simple upload. You will get internal and external benchmarking on a project based on standardized titles, staffing levels and hours. You’ll have all the data and leverage you need with a quick wave of your sourcing wand.

 

Tactic #2- create a secondary analysis that includes all components of the Rate (profit/OH/Salary – For an easy 3-step rate analysis, click HERE ). As always, any analysis should include benchmarking for comparison (i.e. market research, internal benchmarking – old invoicing/proposals, alternate bids/quotes, etc. to strengthen your position).

Now you may already have a tool or technology in place that can do these types of analysis for you. But if you don’t or have access to purchasing benchmarking then you’ll have to get creative. Extra bids or quotes, or internal comparisons are always useful. I would suggest you don’t HAVE to have comparators/benchmarking, only the breakout of the current proposal. But this makes your job a bit tougher, so you’ll want something.

Tactic #3 – Create your own database of the proposal (prior 6-12 months of proposals) to be able to compare for future negotiations. Order a case of your favorite caffeine based substance, because this one will take a long time and a lot of effort. When you get new proposals, add to this database to strengthen it.

Tactic #4 – When reaching the contracting phase include the final breakdown (standardized) of rate, hours, and named staff. Include language to allow for only hours used to be billed.  This will help guard against the specific issue of billing for all hours regardless if they were needed for the project. By naming staff, you will also ensure the old “bait and switch” of proposed team members doesn’t happen. Or if it does, you have recourse.

 

Materials (Travel and Expenses)

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Now that we’ve covered the most complex components, let’s move on to the easier parts to negotiate and analyze. For material issues to be addressed (entire teams attending or markups / out of the ordinary pass-through fees) the solutions are very basic.

Tactic #5-  Complete a detailed review of proposals for hidden language, markups or any type of abnormal fees. Twice. This will address anything they may be hiding and didn’t have a clear discussion with you about it. You’d be surprised how much you can miss on a first pass. If you do find some hidden fees or outright mistakes, just redline the contract and exclude it from becoming an issue.

Tactic#6 – Insert your company specific travel policy in the contract for the supplier to adhere to (along with the usage of the company’s travel provider (i.e. BCD, etc.). Also, include written approval of all staff to be attending prior to any event.

Now depending on where your company is in the Sourcing/Category Management curve, you may have this already standard in contracts. But those of us that are part of newer organizations, it can be a huge savings impact. If there hasn’t been language in the past, I guarantee somewhere you’ve had a consultant bill for a first class ticket, staying at a 5-star Hotel and eating at a Michelin star restaurant. With their team. On your dime.

 

Invoicing (Billing)

To address the last and final set of issues, I typically use similar tactics to those above (why to reinvent the wheel?). If you don’t have software/technology to ensure that all billing is in compliance with the contract, you’ll have to do it manually. And asked to be cc’d on all invoices. Yikes. Or…

Tactic#7 – Schedule time to conduct invoicing reviews quarterly or yearly. Pick random invoices to ensure they are compliant with the contracting language. Then schedule a time to review during your regularly scheduled QBR’s (Quarterly Business Reviews).

Tactic #8Standardize your invoicing to include the same format that you used in the initial analysis including rate, hours, named staffing, and material and expense breakouts. The same tools I mentioned for analysis, can also reconcile the invoices/POs/etc. (Along with a host of other technology solutions).

 

Additional Insight

Tactic#9– Review all information/analysis with your business partners prior to negotiations, to ensure alignment and determine successful outcomes. Have whatever negotiation template you deem easiest to use, and make sure it prioritizes each component of the services. You need to know if it comes down to having a senior level staff involved vs. reducing the rate – which is more important.

 

Furthermore, ensure you have a starting point, least acceptable outcome, most acceptable outcome and BATNA included for each of these elements. Creating an excel or formatted template always helps to keep track of each concession/win and it allows you to do it in an organized fashion. There are many additional complex strategies and leverage points for negotiating professional services if you are in an area of low spend (specifically marketing agencies but can be applied to other services). But I can’t cover them all. This article is long enough!

 

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Knowing when it’s advantageous to have a rate card vs. blended rate. Having insight into industry standard overhead and Profit rates can both provide additional leverage for negotiations. Even knowing that smaller agencies can sometimes analyze out as losing money on senior staff while gouging you on lower level staff and that’s where you should focus to negotiate (can be critical to know and understand).

Most of these things are picked up with time and tenure on the job. And each person’s response to them can be different.

 

It’s why I focused on the data, analysis and contracting portion in my article. These things are black and white. But when it comes to preference of items that can lead to different negotiation styles, those tend to fall in a more grey area. Maybe I’ll address it in another blog. But if I don’t, rest assured what I have given will provide with you with the building blocks to start any analysis and negotiation for suppliers of professional services that have a few tricks up their sleeves.

 

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