Negotiating price
Clients on historically low rates
Just how strong is your relationship?
This is often a difficult issue for service providers. If a client, or prospective client, argues over your price it can feel like an attack on your credibility and indeed your personal worth: ‘Are you saying that I am not worth £750 an hour?!’ I always felt that it was the one time when partner and client were clearly on opposite sides of the table, arguing against each other, whereas the heart of a good client relationship is close collaboration towards a shared goal. It can be challenging and unpleasant for the client as well. To say: ‘Your quote is much more than I was expecting’ could be a negotiating tactic, but it could also be a genuine expression of surprise. Clients will very often have created a budget (and had it approved even at board level) so that if that budget is actually much too low to achieve what they have promised, it reflects badly upon their judgement as well. It can feel embarrassing for a client to ask about price at an early stage – as if they are not sure that they can afford you. Mutual reticence over talking about price creates the worst-case scenario, that price is not clarified and discussed up front, which creates real risks of problems that only become clear when it is too late to adjust the scope of work to meet the client’s budget.
There is typically an unwelcome element of emotion tangled up in what should be a sensible and commercial conversation, not driven by hurt feeling and defensive behaviour. There are also some set-piece ‘discussions’ that should take place over money between the professional adviser and the client (I prefer this term ‘discussion’ to ‘negotiation’ because the latter phrase is so coloured in people’s minds by the idea that the best negotiator ‘wins’). I am going to examine issues around scope (what the price that is at issue includes and excludes); creating alternative offers; the idea of swapping rather than just conceding (a pretty standard negotiation practice, but often underused because partners have not created possible swaps); negotiation in the middle of a matter; having to approach a client to discuss an increase in prices; and, finally, how to deal with procurement professionals.
An initial piece of understanding is important for partners who hate losing at anything. You are supposed to lose some work just because you are too expensive. If you aren’t having that (unpleasant) experience, then your prices must be too low. There is much that you can do to minimise losses on price, but you should not be eliminating them. The reason is simply one of market segmentation, which is probably best illustrated by Figure 4.1.
In this graph I have mapped the price of a one-night stay at a selection of hotels from the lowest price ‘budget hotel’ up to a five-star hotel. The budget hotel should not lose many customers on price alone (‘it’s too expensive to stay here’), but for the five-star hotel the great majority of potential customers will say that there is no way that they are prepared to pay £400 and upwards per night, so those customers are truly lost on price alone. The five-star hotel doesn’t believe that it has to cut its prices so as to capture a share of the four-star, three-star or budget market. It accepts that its market position means it appeals only to a particular segment of the available market of people looking for a hotel room. With very limited exceptions, the five-star hotel doesn’t drop its price when challenged and neither do the four-star or three-star – nor should other service providers.
Figure 4.1 Price per night and market segments for hotel rooms
In other words, the higher your price, the more limited your potential market and therefore the greater the number of people that you will lose because they are not prepared to pay your (comparatively high) prices. Service firms often develop a hunger to take on as much work from as many clients as they can, because firms usually recognise and reward client wins (turnover) rather than profitability.
In classic economic theory it looks something like Figure 4.2, if you plot how much a client is prepared to spend (either on a per hour/day basis, or for a specific project).
In this graph we see five clients, all of whom have different price expectations or budgets. To win every client (all other things being equal) you can price at 250 which price is acceptable to all of them. For Routine Work that wins all five clients (in Relationship Advice it might raise some concerns to Clients 3, 4 and 5 as to whether you were ‘the right firm’). However, pricing at 250 means that you have not maximised the return from Clients 2, 3, 4 and 5 because they would have been prepared to spend more. If you price at 400, then you have a price issue with all but Clients 4 and 5.
Figure 4.2 Price and market share
Now, you can develop different levels of service (perhaps under different brands or sub-brands) to address those different market segments – think of Intercontinental Hotels, Holiday Inn and Holiday Inn Express, which are all part of the same hotel group. Service firms often find it difficult to address different price points in a segmented market because those partners who are able to charge at the top end look down on the lower levels, which they see as diluting their brand message. I predict that in the future sub-brands will become more popular as a solution to this, but they will not be acceptable for all firms. It may come down to size aspirations. If you are and want to remain a top-end type of firm then you need to accept that you can only grow so large, due to the limited size of the available market. Note, however, that Rolls-Royce motors sits as a separate brand within the BMW Group and Bentley is within the Volkswagen Audi Group, which shows how a larger overall entity can address many different market segments.
This preliminary overview, your market positioning, is important because if you do not understand which market segments you are targeting, then you are going to have far too many difficult pricing conversations. One of my former partners summed this up wonderfully after we had endured a fruitless meeting with what we had imagined would be a valuable client, who in fact was used to using much smaller and lower cost firms and who had been genuinely shocked by our proposed prices. My partner summed it up by saying, ‘The client was looking for Aldi and has stumbled into Waitrose’. (In fairness, he waited until the potential client had left.) He encapsulated a really important point. Waitrose, as a supermarket positioned at the top end of the market, cannot match all the prices of Aldi, which is a successful and focussed discounter. Waitrose could spend all day and every day trying to explain to the wrong sort of customer why its prices are higher. Much better to be clear about where you are positioned and what types of clients you are looking to attract for what type of work. As we will see in Chapter 9 (Learning from industry) Waitrose did in fact very successfully create a ‘sub-brand’ of Waitrose Essentials in order to capture more of the available market (but not all of it). In effect, Waitrose, referring to Figure 4.2, said that it wanted to capture Clients 4 and 5 (as usual) but also some of the spend from Clients 1, 2 and 3.
Example - The error of emotion
Early on in my consulting career, I networked into a high-quality boutique firm that was starting to tackle pricing issues with its partners. The partners were failing to maximise pricing, readily agreeing discounts when challenged yet still providing a top-end service (and writing off the excess costs). As a result the firm’s profits were not matching the quality it delivered to clients or allowing it to properly remunerate its people. This seemed like a good opportunity for me to provide really valuable support to an excellent firm. I met with them and then provided written details of the types of projects that would make a difference for them. Alarm bells should have rung when I was then asked to provide a very urgent price quote to deliver a series of workshops which were already scheduled to take place in the coming weeks. I provided several options at different price points just before attending a formal meeting.
It rapidly became clear that my prices were substantially above other quotes they had previously received. In error, the meeting ended up focussing on my prices and how I could possibly justify them. This felt like a challenge to my professional abilities and rather offensive, as if I had tried to trick them. My immediate reaction was to be defensive.
In fact, the correct approach would have been as follows:
- Not to quote without a better understanding of what they wanted to achieve. In reality they had almost completed their thinking and just wanted a talking head to deliver some preordained messages. That was not clear from the scant information provided.
- Not to worry if my quote was substantially higher, but simply to ask questions about what they wanted to achieve and how much they wanted to spend on that. With that knowledge we could have cooperatively looked at possible solutions (for example, for my input to be limited to crafting the key messages and for the actual delivery to be given by a more junior colleague), rather than arguing over whether my initial quote was fair or not.
It was a valuable lesson in removing the person from the negotiation so that it could become a design discussion rather than an argument. A better response to a client who thinks you are very expensive is to wind back into a discussion around what the client wants to do and an exploration of how that might be achieved. That allows you to explore different options rather than arguing about price. If that is not done, then the discussion will be likely to fall into a defence of what the client views as very high prices.
Let’s look now at some set-piece discussions that are frequently going to take place between service firms and their clients, and how they can best be addressed. We will finish with an examination of the role of, and defences to, procurement professionals, the third-party negotiators that are becoming an increasing feature of the service pricing landscape.
There is, as usual, an overlay for the three different types of services that are under discussion. The techniques are going to be largely the same for the three different types of service except that, for Rocket Science, the discussion should be limited to issues around disaggregation. There, the client still wants to have the chosen person (the actual Rocket Scientist) leading the matter and there can be very little discussion around that price. However, it can help to be sensitive to a client’s pressures on spend, and therefore appropriate to examine whether more routine parts of the work could be handled by others inside the same firm (for an example, look at the near-shoring and offshoring efforts of many top service firms), or even whether routine elements can be parcelled out to specialist outsourcing operators. The Rocket Scientist must clearly remain in control because they, after all, are going to be responsible for the final outcome in the eyes of the client. So a robust rebuff should be delivered by the Rocket Scientist if they are concerned that the dictates of a client about how the work is going to be carried out could adversely affect the outcome. Otherwise, it reflects well upon the Rocket Scientist that they have facilities available which can enable cost-effective solutions to the routine parts of the overall task. Apart from that, there should not be much discussion about price at the beginning – assuming that the Rocket Scientist has taken the proper route of delivering realistic budget figures. I have not seen procurement involved in Rocket Science work, but if they were encountered then they must be ignored. They have nothing to bring to the party and could severely damage the outcome (see, for example, most major government procurement fiascos).
Over the past few years, Relationship Advice has seen a much greater focus upon price and much more dissatisfaction expressed by clients who are themselves facing greater pressure to control costs and to manage external advisers more robustly. Here, the market demands of the clients have met a largely unprepared group of partners who have adopted a rather amateur approach to these pricing discussions. There wasn’t so much need for these negotiation skills in the past. Relationship Advice has become the main battleground on price, especially since clients discovered that pushing back on price worked and that partners were almost certain to reduce their prices when challenged. Relationship Advice is the main area where better skills are required and is the primary focus of this chapter.
For Routine Work, pricing has always been a fundamental issue and an area for much negotiation (not discussion). Partners involved in this work will be used to pretty tough negotiations about price and the relevant service specification, and so will probably be used to the various techniques outlined below. At the end of the chapter I have outlined some further thoughts that might be relevant for Routine Work.
PRICE AND SCOPE ARE LINKED
A very typical price negotiation is the one that takes place after a formal quote has been delivered to the client, in which the client seeks to reduce the price to be paid while retaining their preferred choice of adviser (just as happened in the Alpha Kitchens scenario in Chapter 3). From the point of view of the client, they typically have nothing to lose from this conversation and, much more worryingly, they are discovering that they often have a lot to gain. The more often that partners collapse when challenged on pricing, the more ingrained this client behaviour will become.
There are two issues at work here. First, most often, the partner has no real confidence in the price that was quoted as it was really a shot in the dark or a ‘guesstimate’. Secondly, the quote can be somewhat vague in terms of the scope of the work that is going to be involved, so any post-quote conversations will focus upon the one obvious figure in play – the actual quoted price or hourly/daily rate – and the only thing that the client wants to hear is a lower figure.
Both of these problems are addressed if much more effort is put into creating a detailed and realistic quote. This is the ultimate ‘alternative fee’ that is described in detail in Chapter 6 as project-based costing which, in effect, takes services into the modern world of pricing. In pretty much every other area of commerce where somewhat uncertain projects are being commissioned, project-based costing is the answer. This could be the installation of a new kitchen, creating a new IT system for a retailer, building an office block or constructing a nuclear power station. In all these cases there is a need to fully describe what work is planned, how much that will cost and the timescales to be taken. Once real expertise and time has been put into creating this initial quote, the client can see exactly what is included and what is not and the service provider can have confidence that the fees are realistic and achievable. I call this approach ‘project-based costing’ (PBC) because it creates a price around a specific detailed project. This is the future for Relationship Advice (Routine Work being on fixed fees and Rocket Science using a budget followed by value-based billing).
Almost incredibly, service providers will often say that the reason why they have just quoted hourly or daily rates and given only a very broad indication of the total cost is that their work involves many variables, and it is impossible to specify the exact services in advance in order to create a realistic quote. Do they really think that they face more uncertainties and variables than a company that is building a nuclear power station, a train tunnel, a bridge or a hospital’s IT system? The reality is that if you can get away with charging for your time with no limit, then you do.
The change that has hit services is that clients have decided they will no longer put up with unlimited and unspecified charging for Relationship Advice. PBC is a great solution because it is not a fixed fee. The actual cost can vary if something unexpected or extra comes up, provided that client has been told about the extra cost before the additional work is carried out and agrees to that extra work and associated cost. In that way the client stays in control. There is no risk of an unpleasant surprise because any changes in cost have to be pre-agreed by the client. In fact, the most important stage in PBC is the ‘definition of scope’ stage, which is the discussion between partner and client once the initial quote has been delivered. This enables the client to look through the detailed quotation document and ask for changes until a stage is reached where both the actual scope of work and the corresponding price for that scope have been agreed. Think of how you would behave when commissioning three quotes for a new kitchen and then refining the quote with your favoured supplier. It is worth pausing here and looking at the differences between the three most typical ways that Relationship Advice is priced by service providers as shown in the table on the two pages below.
There is one final benefit of PBC. The prices created will be an exact amount and do not appear just to be guesses that have been rounded up. For example, fee quotes for hourly charges or for fixed fees tend to end in ‘000’. However, PBC usually results in exact amounts – e.g. £128,464. As mentioned before, there is clear research evidence that people trust these exact figures more (and seek to negotiate them less) than numbers which clearly have been rounded up.
This leads us to the key learning. It is crucial that price and scope are linked, so that if the client wants to reduce the price, then you can do that by reducing the scope. Let’s look at that in the context of a typical situation where the client wants to reduce your quoted fee. There are essentially two scenarios to examine. A small reduction or a major difference of opinion on cost.
A SMALL REDUCTION
Let’s say that you have submitted a PBC quote for a piece of work and that comes in at £116,430. The client calls and needs to ‘talk about your prices’. In my experience there are two approaches that clients will use. One is to go through the quote with you, on an item-by-item basis, and either argue about the amount involved (‘I think that £22,600 is too much for the due diligence work’) or about the necessity for the item at all (‘why am I being charged £1650 for pensions advice – I don’t need that’). These types of challenges are exactly what PBC was designed to flush out. They enable you to change the price against changes in the scope. You can remove whole items: ‘OK, let’s not do any pensions work on this case. I’ll let you cover that in-house’; or reduce their size: ‘You are going to need due diligence, but if I limit that to high-risk issues (over £100,000) then I could cut the cost from £22,600 to £16,220’.
Alternatively, the client looks to make an overall reduction: ‘I have received your quote of £116,430 but my budget is capped at £100,000 so I’m afraid you need to reduce your fee.’ It is absolutely crucial that you do not drop the price (for the same scope) because the client will be highly dissatisfied. They will feel that you were just ‘trying it on’ at £116,430, because as soon as you were challenged you dropped your price. That just makes them doubt your probity and certainly trains them to challenge every quote that they receive from you in future. In fact, once again, a PBC quote is designed to cope with this type of challenge by a client, because your response is not to offer to keep to the same detailed scope but cut the price by £16,430 (likely to halve your profit), but to respond that you would be happy to revise the quote to £100,000: you just need to go through it with the client and trim the scope to meet the price – i.e. you are going to remove some work and remove the costs associated with that work until you reach £100,000.
You also need some swaps.
In these negotiating situations, which have been essentially converted into much less combative discussions about the exact scope of the work, there will often be requests by clients to do them a favour – for example, to leave something in the scope of work, even though they don’t want to pay for it: ‘I do need you to do the pensions work but I need you to throw this in as part of the overall fee, I can’t afford to pay extra for it.’ Service providers usually find it hard to resist these requests because their training is so ingrained with ‘keeping the client happy’, and these types of small gives can be seen as smoothing the path of a great relationship. So this is where you need swaps. A swap is something that you are going to require from the client in return for the concession that they have asked you to make (and bear in mind we are looking at ‘small’ concessions here, so typically well under 10% of the fee). This is both good negotiating practice (if you concede when you are asked, then rather than satisfying the client it simply teaches them to ask for more and more), and it gives you a chance to gain something to balance against the concession.
The phrasing of the swap is important because it needs to follow the formula, ‘If you could give me [my swap] then I could give you [the concession that they wanted]’. It’s no good simply giving the concession and asking for a swap later on. They have to be linked. Here are some typical examples:
| Concession requested by client | The swap you need in return |
|---|---|
| If you need me to shave £5000 off the price | then I can only do that if you can get me onto your panel for corporate advice. |
| If you need me to throw in the pensions advice without charge | then I need you to give me another transaction of this value in the next three months. |
| If you need another 5% off our rates | then I need you to commit to an annual spend of at least £500,000. |
| If you need this completed across the weekend without an uplift in fees | then I need an introduction to your property director to talk about winning work from that division. |
Given the frequency of clients’ requests for concessions, it is really important that you create and keep to hand your own list of swaps. Areas for these would include more work, introductions to other divisions of that client, warm introductions to potential new clients, changes in payment terms (‘I can only do that if you pay 50% up front’), speaking at a conference with you or giving written endorsements that you can use in your marketing materials.
The overall principle has to remain that if the client needs to reduce the price, you need to reduce the scope, but swaps are useful where the client asks for a small concession.
MAJOR REDUCTIONS
What happens if your carefully constructed PBC of £116,430 is met with the response, ‘I can’t do that, my budget for this job is £40,000 and you are going to have to keep within that’. This shows that there is a big gap between the client’s expectations and yours. First, the very fact that you created a PBC quote means that you will have confidence in your price – it has some real thought behind it, it is logical and realistic for the scope of work described (contrast the top-of-the-head quote of ‘about £100,000’). So now you have two options:
- Sell the quote. This means explaining to the client why you came up with the total that you did (assuming that the client didn’t realise how much work was involved in the project that they had in mind), and then going through your detailed quote to see where it could be reduced. For example, there may be elements that can be (relatively safely) removed, some that the client could carry out themselves, or that could even be passed out to a low-cost provider. The message to the client is that the cost is going to be a lot more than £40,000 (‘no one could carry out this project safely for £40,000’), but that you will work with the client to reduce the cost as far as possible (‘a Mini not a Mercedes’).
- Start again with a new quote. Tell the client that if their budget is only £40,000 then you could not carry out the type of work project that you had in mind, but you could come up with a scope for a different project and one that fits within the client’s budget. You can only do this if you are happy that you can at least cover the basics at a very much lower price.
Neither of the options ends up with you doing a huge amount of work at a very low (loss-making) price.
What about negotiations that take place mid-transaction? An extremely common situation which arises (no matter how well scope and price have been discussed, specified and agreed at the outset) is that variations occur during the course of the work. This could be because new issues arise or the client asks for work that was clearly not included in the original scope. This is often called ‘scope creep’. Service providers cause their own problems here, because they do not stop what they are doing and quote an additional cost. They either (begrudgingly) include the extra work because they don’t want to have an argument, or they assume (wrongly) that they can sort this out at the end of the work by having a discussion about extra money at that stage. Don’t do this. You need to raise and cost all extra work in writing so that the client can see the extra work and cost before you carry it out. We will discuss this in more detail in Chapter 6, but even if the client is not going to pay for the extra work, you can use its existence as a useful swap; ‘OK, I’m not going to charge you for this, but I want you to get me an hour with your CFO so I can see if there are ways I could be helping her’. Alternatively, if these extras start to add up to a large amount then there comes a point where the client will start paying or at the least offer a very valuable swap. To achieve this the important rule is this: you should still send the client a ‘change notice’ showing the proper extra cost, but then show it being reversed out as ‘agreed client concession’ or something similar. This helps the client to see just how much you are forgoing.
CLIENTS ON HISTORICALLY LOW RATES
A scenario that I frequently encounter in my consulting work is where a partner has a long-term client (typically a very large one, or a trophy client) who is on very low rates, or for some other reason is producing a very poor return. This may be due to a historic negotiation when low rates were agreed by a partner eager to land a big-name client, or they may have slipped bit by bit over the years so that what were once reasonable rates have never been increased, or it may be that huge amounts of added value have been demanded by the client, or they argue over the amount of bills delivered, leading to substantial write-offs. Let’s assume that this is a big client for the firm (accounting for 20% of all income) and that their rates are 40% below the full rate.
Although the iniquity of the situation is clear (the profit from other clients is effectively being used to subsidise this client’s unfair deal), the partner is extremely reluctant to challenge the client over the rates that they are on. The reason is very simple. No partner ever wants to return to the firm after a client visit to have to announce to the other partners that they had a price conversation with the firm’s biggest client, it went badly and the firm has been fired. The consequences would be severe. There would be job losses and even the firm’s survival might be at risk. With a major and instant loss of income (even loss-making income) the firm may struggle to pay its overheads and the restructuring costs involved in staff dismissals. It’s a potentially nightmare scenario.
For most partners, the issue is that they simply don’t know where to start. Surprisingly, it can feel to the partner as if they have been disingenuous, because they have hung onto the client only by charging very low rates; and if the partner tries to increase to commercial rates, the client might leave anyway because they could employ a much better firm if those are the rates that they have to pay. For some other partners, they simply don’t know where to start with a price increase conversation, as they are only used to solving clients’ problems, not opposing them and creating a new one.
I had the benefit of filming numerous role plays of these conversations so that, over time, I was able to see what worked and what didn’t. This enabled me to create a process for this type of situation, which is as follows:
- How good a service are you providing? Before you have any conversation about fees with a client, you need to be certain that the client has no complaints with the actual service you are providing (and you need to record that fact). So the best price conversation starts with an enquiry about service levels, such as, ‘So how are we performing for you at the moment?’ or, much better, ‘I have gathered some quick data on our performance over the last six months based on our satisfaction surveys and these show a score of 8 plus out of 10. We are really happy with this, does this sound right to you?’
There is an important reason for this questioning. First, if there is a problem in the client’s mind in terms of your service levels, then your priority is to put that right, not to increase your prices. Secondly, my experience is that, if this service issue was not cleared off the table by being addressed first, then the reaction of some clients to a request to increase prices is to immediately raise service issues, in the clear knowledge that this will put any question of price rises on ice for quite a time.
Let’s assume for the moment that you have cleared this hurdle and have a positive response around your service levels. - Be open, honest and specific about the price problem straight away. When I filmed negotiations, I found that partners were so reluctant to talk about the core money issue (‘we are making losses on your work’, or ‘your prices have not increased for seven years but our overheads have’) that they tended to wait and bring these in halfway through the discussion. In that way they tended to lose impact and almost look manufactured.
Much better to say, at the very start, ‘I’m glad that we are providing the right service, because there’s an issue that you can help me with’. Then get to the core straight away: ‘My CFO/finance committee/managing partner is on my back over your account. I’m getting a return of just 6%, yet my firm’s hurdle rate is 30%, so we need to look at how we price and deliver our work.’ Other issues could be that you are writing off large amounts of time (give the exact cost of this in the last 12 months); that their required added value services are costing too much (again, state the actual cost); that every bill is being disputed and delayed; that they are on a favourable rate for large clients but they only spent £100,000 with you in the last 12 months, etc. - Make a specific proposal that will help solve the problem. I think this lands better if it contains an accommodation for the client as well as an increased cost. For example, you might say: ‘I’m not expecting to make up the 24% shortfall in one year, so I’m suggesting that we phase this in by reducing the discount by 8% each year’, or ‘You should be paying much higher rates for a £100,000 spend, but I’m proposing to keep you on a discounted rate for six months to see if we can build up the volumes of work and if not, to only impose half the required rate increase after that’.
Be prepared to horse-trade in this situation and see what swaps you might be prepared to accept in lieu of a full increase, but don’t be prepared to walk away with nothing. - Make it ‘our problem’ – what are you and the client going to do in order that you can satisfy the CFO/finance committee/managing partner and get them off your back? After all, a proper client relationship is two-way. You need to deliver a great service and they need to pay a fair price. The fact that you are seeking to satisfy an external person or body – CFO/finance committee/managing partner – is really helpful as it depersonalises the conversation and maintains your focus upon being a great service provider.
- Have an exit route. I found this to be crucial when partners were preparing for these (difficult) conversations in terms of convincing them that it could never end badly, with the client firing the firm instantly and all of the horrible repercussions of that. To create an exit route you need to think of the worst possible reaction of a client, one which absolutely rules out any increase in rates, reduction in added value or whatever. In such a case, the partner should back off. He or she should say: ‘Well I hope you also appreciate the position that I am in, I’m delivering a good service to you but my CFO/finance committee/managing partner is telling me I have to sort this out. Let’s scrap the proposed increase in prices altogether, but what else might we do together so that I have something that I can take back to the office.’ This should lead to a positive discussion about alternatives; for example, there might be other areas of business that could be offered to the firm (provided that these are not to be on the same, problematical, terms); there might be better ways of working together which would cut out costs; introductions to other clients that this client could make and so on. I have found that this approach plays well into the ‘problem-solving’ approach at which most partners excel.
- Let’s say the worst happens (although I have never seen a professional fired on the spot merely for raising the question of costs) and the partner has to completely back down. He or she may return from the meeting without any increase in prices or changes in terms and has, at best, just agreed a couple of small face savers which they know will not have much effect on profit. Then they need to start tailoring their service down to the price that the clients are paying, or they need to plan to replace them with better clients. This is like a three-star client staying in a five-star hotel – they are not going to change their behaviour if you continue to give them such a great deal.
If you can start to water down the service, so that the client is closer to getting what they paid for, then this should be done. Some firms are better at this than others. I think the better strategy is usually to seek out clients who are prepared to pay proper rates and once you have them, you exit the lower paying work (as opposed to the much more common strategy of winning more work and taking on more staff but never exiting a loss-making client). I saw this at its best when a former colleague of mine telephoned me to tell me that she would be closing down a division that I had created. She thought that, as a courtesy, she should tell me. It turned out that a few years after I had moved on, market prices for the work had declined dramatically as more and more competitors arrived and created far too much capacity. She had won a major new contract with a better client, so she told me: ‘I am moving all of the staff over to the new work and ending the old.’ Net result, same size building, same number of people, much higher returns. Well done Kath.
DEALING WITH PROCUREMENT
Procurement professionals should never be seen in the realm of Rocket Science (and if encountered there, must be studiously ignored), but have invaded the realm of Relationship Advice simply because it often represents such a substantial area of spend for so many clients. Apart from a very few honourable exceptions, where the procurement team have worked collaboratively with both client and professional service provider to redefine the work and create innovative solutions, my strongly held view is that they are destructive and corrosive not just to the immediate situation, but to the sustainability of the client – professional relationship itself.
I say this having joined, many years ago, the Chartered Institute of Purchasing and Supply in the United Kingdom in order that I could attend their meetings and learn how to work with them. What I found disturbed me. Here was a group of people who were tremendously well trained in the art of negotiation, who had created a real profession with high standards and training, who had then been let loose on service firm partners and it was a bloodbath. Bear in mind that it is possible to have a degree at Bachelor or Master’s level in procurement and that a decent procurement director may well have attended a Harvard programme in how to negotiate. One explained to me that partners in service firms tended to be ill-prepared and assumed they could ‘wing it’ – a strategy that failed when met with research, data and professional negotiation skills.
In my experience, it was much worse than that. I found partners, even when faced with extremely junior members of the procurement team, discussing whether they should discount by 5% or by 10% when asked for their ‘best and final offer’ (whereas the correct response is 0%), and procurement professionals telling me that they had run out of extras to ask for when negotiating with partners, because ‘the partners just say yes to every demand’.
While this may sound like great news for clients (and it may be so in the short term), the end result can be firms carrying out work uneconomically and unsustainably; they are then faced with a choice of whether to cut corners to save costs, or to carry a loss-leading client rather than lose the turnover. Very often, the best people in the service firm learn to avoid the client because the rates are too low, so the partner has difficulty delivering an acceptable level of service.
Even worse, flushed with their success in the first round, procurement then return every two years expecting to create similar savings, and so on. There is no end to their demand for savings, because if procurement cannot show continual savings then they cannot justify their existence and cost. The risk is that they undermine value as partners seek to provide a cheaper and cheaper service to meet unachievable promises of savings. Who is to blame for this sorry state of affairs? All of us service providers who have failed to manage our pricing and work practices so as to be able to produce the facts and figures that would allow us (and the actual client) to keep procurement at bay. We enjoyed cost-plus pricing, annual price rises where we simply passed on our increased costs, giving bonuses to our staff based upon how much they could bill clients, a culture that would punish efficiency with lower returns and celebrated ever higher incomes as a result.
The blunt instrument of competitive tenders, hard-headed negotiations, targeted reductions, online auctions and aggressive panel management were properly earned as a penalty for lazy pricing behaviour. There may have been an overdue balancing of the client – service firm power relationship. Now partners face procurement in an area where we should have been able to keep them out – Relationship Advice. Given that reality, I consider that there are two elements in a successful defence strategy. First, to build up your direct relationship with your clients, and second, to learn how to negotiate with this professional opponent. Let’s look at each of these in turn.
JUST HOW STRONG IS YOUR RELATIONSHIP?
I named the middle band of work ‘Relationship Advice’ for good reason. It was here that I saw strong evidence of the ‘Trusted Adviser’ model as described by David Maister, Robert Galford and Charles W. Green in their seminal book of that name. If, and only if, you really form a relationship with your client, then your client will protect you from procurement. The client will very typically not have the same interests as procurement. They can be quite opposed – procurement need to show quantifiable savings (otherwise why is the company spending so much money on procurement?). The actual client user of your services has quite different drivers. They want advisers who really understand their business; they may need fast responses, ready availability, expertise, high levels of trust and so on. What are the chances that the client user will receive what they want if procurement substantially reduce the fees paid or change to cheaper advisers?
In a real relationship, the client sees part of their role as being to say, ‘I don’t care that they are more expensive (than the alternatives), I have to keep them as they are essential to my business’. That creates a corresponding obligation on you to truly form a relationship and to give the client the facts and figures that help to justify their defence of you. That might include satisfaction surveys, details of actual results achieved and of added value delivered. In the right circumstances you and the client will work together to make sure that any concessions that have to be given to procurement are minor and do not have much impact on your fees or profitability. Here are some real-life examples of creating a saving for procurement while preserving the right level of service and of fees for the client user and for the service firm. In one case we created a ‘B’ level of service which would be 10% cheaper than the ‘A’ service that we had been delivering. This B service would be made cheaper by using more junior staff, and therefore the client would choose the B service whenever a matter was not that urgent/important. Procurement were happy and went away, having booked a 10% saving. In practice, over the next two years, most of the work sent to us was marked ‘A’. In another case we agreed with the client that we should aim to increase our fee rates by 12% because it had been several years since there had been any increase in rates and we had improved the service being given. This was then put on the table for procurement as part of the negotiation. In the end we agreed to reduce the increase to 7%, provided that fees remained above £1 million each year. Again this resulted in procurement booking a ‘saving’ of 5% (while we had an increase of 7%).
Provided that you have created a real and valuable relationship with the client then you should be able to create some ‘wins’ for procurement which do not damage that relationship. I have heard this called ‘feeding the beast’ in that it is unrealistic for procurement, given a job to do, to walk away saying they could not achieve anything (although of course you can direct them to less prepared competitors). Let’s look very briefly at the actual negotiation phase with procurement.
NEGOTIATING WITH PROCUREMENT
It is usually part of the role of procurement to shake the confidence of the existing suppliers. They will use a number of techniques to do that. They will look for service delivery issues and quote these relentlessly. They may tell you that you are out of touch, market prices have been dropping fast and you need to ‘sharpen your pencil’ and try again. They may say that you cannot get through to round two of the procurement process unless you offer rates of under £400 an hour for partners (even when that is not true). They will find a low-cost, hopeless competitor that neither they nor the actual client have any intention of instructing, because that will give them ridiculously low rates that they can feed into their spreadsheets to tell you that your rates are ‘13% above the median and need to be reduced by that amount if you are to have any hope of winning the work’. The better procurement professionals will be able to achieve a massive amount without telling a direct lie.
Given the highly service-orientated, trust-built, honest, professional relationship that we are all trained to deliver, it is really easy for us to be wrong-footed by the behaviour of procurement and to believe everything that they tell us. So we need to be better prepared and better at negotiation, otherwise we will let ourselves and our clients down. Here’s a plan to survive procurement:
- Prepare. Procurement deal in data, and if they roll out masses of data and you have none then it puts you at a disadvantage. Have your finance team give you facts and figures and have someone from the finance team be prepared to negotiate on your behalf. You need someone who can challenge every argument that procurement use, while you stay as the service-orientated professional.
- Don’t believe them. If you accept everything procurement tell you then you have already lost. If I am told that I am 20% too high I would say, ‘Only 20%! We should be much higher’. I ignore all statements about needing to deliver my ‘best and final offer’, or that ‘I need to give at least a 10% reduction’ or whatever. These are all meaningless arguments. Partners tend to accept at face value what is said to them by fellow professionals. That is a mistake when dealing with procurement, who are trained to unsettle incumbent suppliers. Whenever they make a demand ask them to justify it, ask for evidence; assume it’s untrue or at best partly true.
- Have some demands of your own. Far too often I have seen partners go into a negotiation with procurement assuming that it is going to lead to reductions, and the only issue is how big those reductions will be. Like any negotiation you need to trade rather than concede. For example, procurement want a 10% reduction on rates. ‘I can’t do that, but if you spend £500,000 in the next 12 months on a new area of work for me then I could shave 2% off the partner rate.’ Or I might say, ‘I can’t move on the partner rate, but if we reduce the number of staff seconded to you by two, then I can provide a back-end rebate of 3% of fees’. Interestingly, I have found that in any negotiation, you are entitled to ‘red line’ one issue, which seems to be accepted by the other side. So, if I find that on a particular account most of the profit arises from the work at senior manager level, then early on I would say that I could not do anything about the senior manager rate, but I might be able to increase the value of training, or whatever. In that way I might be able to preserve the main profit driver for me.
- Be clear on your value. This advice was given by the procurement director of a major bank in a conference speech who was asked how professionals should respond when told they were (for example, £50 an hour) too high on price. It’s a response that I have used numerous times since I heard it and it works. The correct response when told your rates are too high is:
That’s rather one-dimensional isn’t it. It is value that matters, not the price. There are a large number of factors in choosing the right adviser. Speed of response, knowledge of your business, geographic spread, reputation, clarity of advice, commerciality and so on. The right adviser isn’t going to have all those factors and be the lowest price. If it’s just about the lowest price then we don’t need procurement do we? My 10-year-old daughter could do that.
You can of course develop this response to suit your needs. I used to carry a copy of What Car magazine with me which (for example) showed at the time that the Dacia Sandero was the cheapest new car in Britain. So I asked if they and their clients all drove the Dacia Sandero. If they didn’t then it seemed that when choosing a car for themselves they didn’t want the cheapest, but when buying professional services for their company ‘cheapest was best’. That simply couldn’t be right.
For a period, I gave talks to procurement professionals on ‘buying legal services’ (in the hope I could find common ground). At the final such talk, I asked 50 of them, ‘When you are having your hair cut, please put your hand up if you choose the lowest price hairdresser that you can find’. Two balding men at the back put their hands up. I challenged the 48 who were left,
So, the rest of you don’t choose the cheapest hairdresser. So why do you sit opposite me month after month, and tell me that you cannot use my firm because we are more expensive than a competitor? Why is it all about price for my services, but when you are having your hair cut, it’s not?
After a pause a very nice lady in the front row explained: ‘That’s what we are paid to say. You are supposed to ignore us, or to laugh. But no partner ever laughs. They just cut their prices further. So that’s why we say it.’ Fair point! - Swap, don’t concede. Giving concessions to procurement doesn’t stop them demanding more. Quite the opposite – the more that you show you are willing to concede, the more ambitious they become in their demands. So every concession from you has to be hard work for them, has to take time, has to involve other layers of authority and should be delivered only in return for something valuable from the client. For example, procurement are looking to cut rates by 10% (in which case I suspect they will start by demanding 20%, in order to ‘anchor high’ – so that if you ‘only’ give 10% you feel as if you have done well). The correct response could be:
Well that’s interesting. It is four years since we increased our rates so inflation has given you 9.4% already across that period. This is a two-year contract, so I would be prepared to limit the increase in our rates to 10%, provided that volumes increase by at least 15% year on year.
Or you might say: ‘I can’t cut by 20%, that’s silly. If you are able to get volumes above £1 million by year two of the contract I could give 5% off in year two.’ Saying ‘I can’t’ and ‘no’ are crucial tools. - Drive a wedge between procurement and the client. Sometimes the client has a common interest with the procurement professional. For example, the client may have had instructions from their CEO to cut spend by 25%, has no idea how to do it, and is only too happy for procurement to drive the savings while they try to maintain a good relationship with the advisers affected. That would be a signal to have an in-depth meeting with the client (not procurement) to see what changes can be made in scope, team composition, timing or whatever can drive real savings (i.e. not the same people doing the same work for the client but at much lower rates). However, in the great majority of cases, the client’s interests and those of procurement are very much in opposition. The client wants a great level of service, one that enables them to do their job. They don’t have unlimited money but it is rare for a client to want the lowest level, cheapest service (remember the haircuts!).
On the other hand, procurement need to show demonstrable savings or they are out of a job. Can a procurement director (or external procurement company) tell the CFO that they are sorry but they simply cannot save any money from the company’s services spend? External procurement companies may be on a contingent fee (a proportion of savings achieved). After the exercise, procurement want to show a saving, but the client doesn’t want to see the service they were receiving being degraded. So all requests from procurement can effectively be met by asking the client which parts of the current service they want to be downgraded or removed. Remember, scope and price are linked. Imagine procurement turning up to discuss a quote for a fitted kitchen. Sure it can be reduced, we just need to agree what parts of the scope are being removed. If it is all about the hourly rate then you might talk of using more junior staff (while asking procurement if they aren’t being one-dimensional). - Beware post-deal demands. A common technique is for procurement to make it look like a deal has been reached (especially if that means that you have told all your partners about it), and then to request some extras. This is quite a famous negotiating trick. It is completely dishonest and needs to be ignored. If, as the negotiations draw to a close, your side starts talking about drafting press releases, then this is petrol on the fire for this issue. A typical approach is that procurement telephone you, post-deal, to say that there has been a bit of a problem (e.g. the board or the CFO won’t sanction the deal) unless you can just move a little. I was caught out by this myself with a procurement director who phoned me every three days after a major deal to ask for ‘Just one more thing’. It gradually dawned upon me I had to use the word that partners almost never use. That word is no! He was going to phone me every three days for the rest of my life until I said no.
A similar (and well-known) trick is called ‘appeal to external authority’. In this device, after you have completed your meetings and agreed a deal, the procurement professional says, ‘That’s great, I just need to get this signed off by my CFO/finance committee/other external person not in the room’. If you agree to this, it means they get to have another round of negotiation (because the CFO or other fictional external person requires just one change before the deal can be signed off). The correct response is to say:
Oh, I thought you had power. If you don’t, then I must also refer this deal to my CFO/finance committee/other external person not in the room. I can assure you that if your CFO wants concessions then my CFO will want twice as many; he/she is really difficult. So I suggest that we both honour the deal we have agreed today.
- Use time against them. While procurement make increasing demands upon the professional, it can often be the case that the actual client user is keen to finalise matters. When I originally came across procurement I was keen to be helpful, so dealt with all of their queries very fast. That’s a mistake. Take time and explain that decisions like this have to go to your board, head of department or whatever. Make the client start pressuring procurement to stop arguing.
- Online auctions and other tricks. I want you to go to your partners and suggest a new method of pricing your services. Here it is. If a client telephones you and asks the price for a partner you will charge Price A; if they use email then you will charge Price B; if they ask a partner while sitting next to them at an event then you will use Price C; if they ask at your reception desk you will use Price D, but in every case you will deliver the exact same service – it is only the price that has changed. That’s pretty mad isn’t it? So why, when presented with an online auction, do partners prepare to reduce their prices (setting a minimum level which is always reached) when the client, or more likely procurement, sets up an online auction? That’s the same thing. It’s saying you are going to have a lower price just because you have to type it online!
This despite the fact that the client will expressly say that they are under no obligation to accept the lowest bid and even though they will typically include one ‘low-cost no-hope’ bidder that will drive prices down for everyone. Here is the answer. If this is Relationship Advice, then the client (as opposed to procurement) is not going to choose their professional adviser on lowest price alone – but you have to work with your actual client to make sure that you have a service which best meets their needs so that they will insist on using you, even though you are not the lowest price. If you have done that then you should not change your price just because procurement put you through a (wholly inappropriate) online auction (whose realm should be restricted to Routine Work – see below). Enter one price and that’s it, behave no differently than if there was no online auction. - Understand the ‘procurement grid’. When procurement are deciding how to deal with various suppliers to their organisation they will segment the suppliers – for example measuring low vs high spend against factors such as the number of available suppliers, the cost of switching suppliers, or the complexity of the service. Score low on these factors and you will be forced to compete aggressively on price, and not just once but every two or three years. Usually, procurement will consolidate suppliers so that the few remaining ones have a lot to lose and cannot risk holding out on price. Score highly and you will find talk of long-term relationships, investments in innovation and partnering. You can only improve your position in this grid by working closely with your client (between procurements) to create a genuinely valuable and differentiated service. If you can’t find the time to do that, then expect to spend vastly more time trying to make unprofitable rates work for you.
- Don’t let procurement stop you talking to your client. Bear in mind we are talking about Relationship Advice. Procurement don’t want you talking to the user client because it undermines their power. If you are an incumbent supplier then you may have many matters on with your client, and you should feel free to work with them on any changes that you are planning to make in reaction to procurement’s demands. If you are not currently a supplier then you should require face time (at least an hour) with a key user in the client firm so that you can understand their needs. If you can’t get that face time then don’t proceed with a bid (why should you spend tens of thousands of pounds on a pitch to a client who will not give you one hour of face time – it’s a strong indicator you have only been invited to make up the numbers or to rattle the incumbent). If you are in a controlled environment (such as the public sector), so that suppliers are formally forbidden to speak to the user client, then you should have been talking to them between bids. Bidding blind on paper is not a recipe for successful pricing – much better if you have built a great relationship before the bid (in which case if the client wants you, they will have provided great guidance before any bidding process commences).
- Your best and final offer has already been made. Don’t, ever, drop your price just because procurement challenge it or because they ask part-way through a bid process for your ‘best and final offer’. Put in the correct bid at the outset, and only horse-trade at the very end of the process when you swap final concessions for trades in return – otherwise you simply look dishonest and the user client looks incompetent. To put forward, or to be charging, one set of prices before procurement arrive and a quite different set afterwards looks like you have been overcharging, that the client has been lazy and that procurement are wonderful. Any changes in price have to be linked to changes in scope, volume, timing or other valuable concessions.
- Move in small steps. The next offer after a 10% reduction is 11% or 11.5% – it is not 15%. Don’t move in blocks of 5%, that is a huge leap. Put thought into an offer and make it both conditional on a concession or benefit to be received from the buyer and only a small move upon your last position.
The foregoing might suggest that I am not a fan of procurement. I am not. That does not mean that I do not recognise the need for service firms to be efficient and for clients to save money where they can. I just believe that a more collaborative approach is needed. If anything, it has been the failure of partners to address this issue directly with their clients that has let in procurement. If partners had worked with clients to create data around their performance and value, they would have had a great defence to the incursion of procurement professionals. In Chapter 10 I deal with the crucial issue of saving clients money, but in ways that work for both the client and the professional. It is harking back to older times, before the procurement profession drove farmers to raise animals in intolerable conditions, to farm vegetables chemically and intensively to create tasteless food with lower nutritional value, to award government contracts at the lowest price which then fail, costing billions, and to lead a drive for bigger and bigger, less human relationships. Apart from that procurement, are fine.
NEGOTIATIONS AND ROUTINE WORK
Just as we saw the value of swaps and clear service specification in Relationship Advice, there are additional factors involved in Routine Work where procurement may be the norm (they may be driving the purchasing project with little or no involvement from the actual users of your service). The main aim of procurement in my experience is to create a tight specification for the service, and then to ask as many firms as feasible to quote or bid online for some or all of the work.
That would be a fair enough strategy if services were like tangible goods – but they are not. For tangible goods – whether this is the proverbial 80gsm copy paper, or a pint of 2% non-organic semi-skimmed milk, or a spark plug for an engine, there is an ability to create a tight specification and then to buy against price. For the suppliers of these the battle is really over tight cost control and innovation to drive down the cost of production, because both the specification and the (low) price have been fixed. This simply doesn’t work for services because of the high element of human interaction involved in delivery. To aver that a call to a call centre is the same whether it is handled by highly trained local staff or is outsourced overseas to a low-cost provider is incorrect and dangerous. It leads to poor service and (I am pleased to say) quite often to the repatriation of services back to the original country, once clients experience the big difference in actual (as opposed to specified) quality. In the United Kingdom there is in fact government support for companies who want to ‘reshore’ – to bring back services that were offshored to save money. If procurement is such a great idea this would not be necessary. If you use technology and innovation to drive down your own costs of delivery, you will have the flexibility to meet challenging prices while still giving a good level of service to your clients, which is quite different from using lower cost, less trained people.
If you are a supplier of Routine Work then you need to avoid it becoming a single-factor, one-dimensional discussion where the price per matter is the only one in negotiation. The crucial issue is to make sure that you both differentiate your service from competitors (see Chapter 8) and collect data on how you are different and better. Work very closely with your client between retenders in order to do this. Measures might be speed of average matter, typical results, satisfaction surveys, reduction in administrative work for the client and so on. You need to be able to talk about a number of factors (and even to tie in your price to hitting targets, such as charging 1% extra for every day shaved off the current process with a penalty of 1% reduction in fee for every day of delay).
Other tactics include charging for extra elements and variations on a strict basis so that any (even minor) changes required by the client are charged. This can often be set up post-procurement by agreeing directly with the client what types of extras they would like and at what cost. Once procurement have ‘left the building’ it can be possible to agree service variations that can be requested on specific matters at extra costs. This appears to keep both parties happy: procurement book the saving and then the actual user can decide if any extras are needed. Additionally, optional features are a great source of extra income – for example, agreeing to remit money by cheque but giving clients the option to have a same-day electronic payment for a fee per transaction.
It is also worth investing in creating switching costs for the client so that it is not just a matter of changing from you to a cheaper supplier. Good examples include holding substantial parts of the client’s own data by digitising all of their working documents, integrating your IT with their systems, or seconding staff to the client’s site to handle part of the overall process.
Perhaps the best strategy is really to collaborate with clients between bids to improve your service, rather than the much more typical flurry of activity when procurement actually arrive on the scene. This applies whether you are an incumbent or a new supplier seeking to join the panel at the next cycle. For the incumbent, you are in a favoured position to be able to integrate and improve your services so that they are delivering greater value to the client, and/or so that you have driven efficiencies and cost savings using technology or simple process improvement.
If you are a new supplier then the worst thing that you can do is to take part in the next procurement cycle. As the untested new firm, you could only realistically win a place on the panel if you offer a clear price advantage over the existing suppliers. Don’t do this, as it is a dream for procurement to find a supplier like you who is going to buy your way onto the panel at rock-bottom prices. They can use you to drive down the prices of the incumbents (unless the incumbents have read this text) whether or not you actually win any work from them. If you do join the panel, your prices will be horrible, and you will justify them by saying that you have won a new client and in any case all the existing suppliers have dropped too. What will you do in two years’ time when you have another round of procurement designed to create further savings for the client?
Better that you approach the actual client (not procurement) mid-cycle and offer to carry out a set amount of work for free, ‘so that you can get to know each other and because you want to create something different for them’. Most clients (provided there are not high switching costs) will be happy for you to carry out £20,000 or £50,000 or whatever of work for free so that you can test out your systems and services. You have to gauge the amount of free work that you will give based upon the size of the prize. The client then saves money, and if you can create a service which is better than their existing suppliers, why wouldn’t they then want to both send you work and have you join the panel at the next retender? When the next retender comes along you are much better placed, as a known quantity that has already delivered a more valuable and more tailored service, rather than being an untried supplier just adding to the competition at the next retender date. In addition, the free work that you have provided is unlikely to have actually cost you much (assuming you are not going to take on more staff or accommodation to carry it out, but are going to handle it with your existing capacity). So you will have provided real value to the potential client at very little cost to you. It’s important that the work you carry out is free. Don’t offer it at low cost, or the client will bracket you at that low cost and it will be difficult for you to ever reposition yourself at a higher price.
In the next chapter we are going to look at the surprisingly high impact of relatively small reductions or increases in price, and why a pricing project at a firm can have such an exciting and positive impact upon partners and staff alike (and also explains why you should not drop the chocolate biscuits from your conference rooms).