Even after all these years of doing business, both as a customers and as a supplier, I am constantly amazed with the number new tricks that suppliers come up with to try and make a buck extra from a customer and vise-versa. Much like the “Masked Magician Show” in this article we try to demystify the service pricing and tell you what other service providers hold as a secret. Read this to make sure that you don’t leave any money on the table and yet have a win-win relation with you supplier!
Goal: Whether you are a company that is working with a service provider for the first time or if you have been already been working with one, you want to make sure that you are getting the best value for your money.
Background: In order to achieve your goal, you have to first start by understanding your internal costs for the service in question. From what we have seen the components of the cost are:
- Labor: Direct salaries, bonuses
- Benefits and Insurance: Health, medical, perks, travel, out of pocket expenses
- Infrastructure: Building, electricity, water, security, sanitation, etc.,
- IT: Computers, Phones, Internet, Servers, ISP, cloud, IT department personal costs, software, upgrades
- Support Services: The overhead cost per employee of running support services
- SG&A: Sales and General Administration that includes marketing and cost of management will also have to be factored
- HR & Legal: Cost of morale, company outings, hiring, firing, career planning also must be considered
Most companies fail to look at all these costs as total employee cost. U.S companies believe that the ratio of labor cost to overhead (All costs from 2 through 8), is 1:0.5 meaning, if the labor cost is $40,000/person/year the actual cost to company is $60,000/person/year. But this is not true. In reality, the ratio is 1:1.
If you are working with an off-shore supplier, your total cost should reduce to just about your direct labor cost (Roughly 40% savings). If you are working onshore you can expect a reduction of 5-10% of your cost.
The key point to establish in any pricing agreement with your supplier is to make sure that you and your service provider both gain when your business comes out ahead. That way you have alignment of interest.
While the outline provided above is a good win-win strategy, most suppliers try little tricks listed below. This is insincere and not in the spirit of the win-win relationship. DON’T fall for these tricks!
Trick 1: Setup cost: Most service contracts should have no major setup costs other than training and IT connectivity. Suppliers should not be charging extra for setting your business up in their environment. This is a strict NO-NO unless you are asking your supplier to set up a special infrastructure for your needs.
Trick 2: IT cost: We have met some suppliers that charge extra for bandwidth, standard hardware, software, etc. Again, unless you have special hardware, software requirements no supplier should be charging you for their IT costs.
Trick 3: Training cost: Training for operations should be on the suppliers. Especially ongoing training. This is one of the key values that you get out of an external service provider.
Trick 4: Minimums: A service provider worth their salt should not have a minimum. If they have minimums, it simply means that they don’t want your business. Do you really want to work with a provider that thinks that you are too small to work with them? Ask this question without fail and if a suppliers says that they have minimums, tell them that you DON’T want to work with them since you as a customer that don’t matter to them!
Trick 5: Communication cost: Don’t let a vendor convince you that there is a cost to communication that is extra. In this day and age if both of you are ready to accommodate a little, you will be able to communicate with the fixed overhead that you already have for your internet bandwidth.
Trick 6: Quality costs: Some suppliers charge extra for giving you required quality. This is rubbish! If someone says that they are going to keep a quality person or team that is going to cost you extra, just kick them out. Quality and Timely delivery is the Key Result Area (KRA) for your service provider. They can’t be charging you extra for this.
Trick 7: Management cost: We have seen service providers charge customers extra for management overheads. You can have a resource allocated for management but they should not be charged more. They should be made available to you for the same labor cost as your other resource. You should insist on this.
On the other hand we have seen customers do things that kill supplier relationships. Remember, if your partner is hurt, in the end it is going to come back and hurt your career and your company. We have listed a few common mistakes made by customers.
Mistake 1: Price Squeeze: Don’t push your supplier on the price all the time. In the end if the price starts to hurt them, it will show in bad quality and bad service that will result in business impact for your organization.
Mistake 2: Paying Late: Pay your suppliers on time. This is critical for their success. While having a big Account Payable (AP) is good for your company in the short run, suppliers live and die by cash-flow. May sure you pay them in a timely manner and help them run their business well.
Mistake 3: Timely invoicing: Push your suppliers to invoice you every month on a specific operating rhythm. This will help you manage your cash flow better.
Mistake 4: Resource productivity management: Never get into the management of individual productivity of your supplier resources. This will get you back where you started. Your Key Result Area (KRA) is to get the job done. Just set a goal at a department level and let the supplier deal with the resource issues. That is the value you are getting from the relationship.
Follow these guidelines and you will come out ahead all the time.
Vantage Agora will help YOU save money by saving upto 40% of your operations costs! All this with NO surprise pricing, NO start-up charges, NO obligation trials and NO minimums! Meet the best back-office and operations teams at the TMPAA mid-year meeting at Boston. Visit us at booth #13 or contact Mike Fieseler (VP Business Development) at (216) 802-8283 or email firstname.lastname@example.org for more details.