Congratulations! I’m offering you a free steak dinner, at the restaurant of your choice. Where do we go? Ok, great. Now I’m offering you a steak dinner, at the restaurant of your choice, but we have a $40 budget. Where do we go? Somewhere different? Same offer, but a $10 budget. Where do we go?
Chances are all three places are different. One place may have cloth napkins, fine silverware, and free mints in the bathroom. One place may serve your steak from a buffet line. One place may serve grass-fed, organic beef. Most likely each experience is vastly different, the food different, and most likely your expectations are different. Yes, each is a steak dinner – and you didn’t pay – and hopefully your core need was met – your hunger was sated; but each meal evoked a different feeling, level of pleasure, and we also had different discussions at each one. Depending on where we went, you left with a different emotion and a different perspective of me, your host. Your emotions probably ranged from what a treat, how enjoyable, the service was fantastic, and every need was met, to my own grilling tastes much better than this to I cannot believe the table was disgustingly dirty.
How does this relate to contract negotiation, price, and cost? Read on.
Most companies equate a successful contract negotiation as obtaining the most favorable terms possible. The process and outcomes viewed from a competitive perspective. Asking such questions as did I secure the best price, how do I limit the markup or margin from the vendor, and what can I do to get the best payment terms? This approach rarely yields the best results and instead creates additional costs borne by other portions of your organization.
My experience over the past two decades transferring these contracts into working relationships and execution leads me to recommend a different approach. An approach that is focused on value, not price. Value meaning the comparison between all the resources expended in to realize the goals of the contract, aka the cost, with the results and outcomes achieved. I will share my perspective and use the context of an IT Asset Disposition contact to maintain a bit of specificity.
There is an exceptional level, beyond value, and is gaining traction. It’s an approach I highly advocate, and it is value alignment. Many companies are now evaluating their actions with an additional perspective – does my business behavior align with the values we, as a company, claim to exhibit.
We will explore the three Levels of Contract Outcomes Maturity companies progress through: Price, Value, and Values. As we go through the levels, we will also include the actual steps and processes that correlate to progression.
The First Level of Maturity is a focus on Price. How much did I spend? The goal is minimizing the amount spent. Companies should start here, as there are important processes and steps to implement before moving beyond this. As a starting point, this ensure your organization devotes some level of attention to the idea of contract negotiation and implementation and some sort of process is created. The initial process is the most difficult. Going from none to one is hard. Revising, editing, improving is typically easier.
The Second Level of Maturity is a focus on Value. This generates some and discussion that evaluates how much I spent and correlate it to what I received in return and was it worth it. This requires a greater tool set and improved methods of comparison. It requires the gathering of costs, which extend beyond prices and requires you have a rubric for evaluating and grading outcomes and results. A value approach typically yields better results as it considers more outcomes and effects. It is more difficult to execute and requires better interaction of various stakeholders and a more complex model for evaluation.
The Third Level of Maturity is Values. Specifically, aligning outcomes with your organizational values. The core criteria on value are retained and MUST be met, but the additional criteria of organizational values are incorporated into the decision process. Most importantly, consideration is given to ensure vendors are aligned from a social and environmental impact perspective with you. This is the level in which how business is done, how the vendor operates, is considered. If your company has formal commitments or brand positioning, you are now using those as considerations in vendor selection. You often hear the words authenticity used with regards to brand. This is how you demonstrate authenticity: alignment between words and actions.
Now that we reviewed the Levels of Maturity, let’s review some tangible steps that you must take to progress through the levels.
The first step in successful contract generation is internal. The stakeholders must agree on the problems they wish to solve. Ask questions like: What are the non-negotiable outcomes? What are the minimum criteria? What are our constraints? And most importantly, talk through what life looks like, what problems dissipate, what gains are created, from an optimal solution. The vendor management or contract management team must be included as stakeholders. Likewise, the business units impacted or utilizing the contract must be included.
For ITAD, your non-negotiable outcomes should include legal compliance from a data security and environmental perspective. Challenge the team to be honest on constraints and minimums. Focus time on the ideal future. Maybe you gain increased time to perform transformation projects. Maybe you spend less effort in arranging, coordinate, following up. Maybe you have corporate compliance to a single standard reducing vendor payments, contracts, etc. Each stakeholder has a different optimum. Consider them all.
The next step is to work with several vendors who meet the minimums and engage in a candid discussion of the problems you want to solve. The biggest mistake I witness, is companies want to keep this secret. They want vendors to guess, to “show me what you have”. A great provider, one that provides a solution, needs a problem to solve. If you don’t have a problem or an ideal outcome, then you are best served by obtaining the best price, as the outcome should be a commodity. If you are buying raw materials like sugar for food production, if the sugar meets your specs and your timeline, price is the differentiator. For a solution or service with multiple outcomes or variable inputs, sharing the desired end-state is critical for the provider to generate a tailored solution.
I recommend you look for a provider with a catalogue of services which may be combined in unique ways – customized or tailored – to best suit your desired outcome and constraints.
The next step is to critically and analytically evaluate the proposed solutions. Look for and be open to additional insight. Ideas or thoughts an experienced provider may bring that may be overlooked without that unique perspective. When you find companies that provide insight and perspective, you should reward that behavior. These are the suppliers who will bring additional value above price to your organization. They will share what others do. How others do it and what problems they encountered or what preventative mechanisms they undertook. Drive transformation in even the most mundane parts of the organization. A responsible supplier highlights unmentioned risks, brings facts and examples.
At this point you have ensured an alignment between your organization, the perceived problems, the minimum standards, your desired end-state, and a vendor that best fits amongst those categories. This is sufficient for most companies to decide and select an appropriate vendor or partner.
However, as an advocate for more, as an advocate for increased responsibility by companies and individuals, we should ask, what else? The next level of alignment and cost is at the corporate values level. Most companies have values or stated desires coupled with an implicit image. Organizations at the next level ensure corporate alignment between suppliers and company at the value level. These values include the environment, social impact, and business practices. One great model for this is “Conscious Capitalism”. There are a good number of organizations that measure dimensions and performance, including B Labs which certify B Corps. Aligning values is something we see with increased frequency. Although our experience shows that most value alignment is not implemented or demonstrated across business units nor included formally in the proposal or decision stage.
Once selected and services performed, you will need to revisit performance at prescribed times based on your predetermined evaluation criteria. This is true for all three maturity levels: Price, Value, and Values.
In summary, as you think about cost, think about all the efforts and resources used by an organization in its pursuit. When you break down the cost of a contract, you must include the time, the wages, the amount paid, the complexity, the downstream effects of a missed SLA or deliverable, the impact on corporate image and alignment. Cost is always much, much more than the price you pay. You must find a way to quantify these costs and then evaluate what you receive against these costs to determine value.
Finally, look to the future, ponder how to include corporate values into the manifestation of your relationships with suppliers and achieve the outcomes you desire. I call this third stage, Value with Values. Be a leader and advocate for a broader inclusion of items in your cost analysis. We, as companies have a broader responsibility than simply profit.