Tag Archives: suppliers

Why “Free Help” With Buying Decisions Costs More

As consumers, we’re wary of so-called “free” products and services as there’s always a hidden cost. Why, then, are procurement teams willing to accept free help with supplier selection?

Businesses often seek help with their buying decisions, especially in complicated categories such as telco or energy. Preparing an RFP requires a willingness to trudge through data swamps, while analysing supplier responses requires more than a strong coffee to do properly.

When a third-party broker says that they’ll help – for free – the temptation is to say yes, if only to avoid data swamps and caffeine addiction. However, you need to keep in mind that the people who help “for free” are still going to get paid, just not directly by you. They’ll collect their pay from your suppliers who are willing to pay a commission to get the opportunity to service your organisation. In turn, those suppliers recover commissions from their customers (you), either as a line item on the bill or through higher prices. In the end, you’re still paying for the service, just not up-front.

For large businesses with lots of cost centres, this can be a good way to share the cost of getting help. Branch stores pay their bills and, without realising it, pay for the help you received through higher prices. Procurement managers who use this approach can look like heroes because they claim savings and a successful outcome without having to win broad company endorsement for using expensive 3rd-party assistance.

Selecting suppliers for the wrong reasons

The danger of commission payments is that different suppliers pay different amounts. Some commissions contain a ratchet mechanism with longer contract terms, while higher contract values generate higher commissions.

Unfortunately, brokers who offer their services for free are incentivised to select the suppliers who pay them the most, rather than those who deliver the greatest value to the customer. The usual outcome is long-dated contracts with a single source supplier. At least the billing is easy, but your business will end up paying more in the long-term due to lack of value.

Up-front payments

Paying brokers up-front changes their incentives. Instead of focusing on supplier commissions, they now focus on demonstrating their value to you in a bid to win further business from your organisation. “Brokers” go upmarket and call themselves “consultants”, working harder to realise the greatest-possible savings and service levels. Customer and consultant incentives align.

The positive consequences of fee-for-service payments are shorter contract terms and more suppliers. Shorter contracts reflect a balance between testing market prices with the logistics of changing suppliers. Having more suppliers means you are able to split your requirements across the lowest priced suppliers to get the best possible price for your portfolio of demand, rather than being herded toward a single-source supplier.

“Free” services in IT

For software companies, “free” represents a gateway product, or a way of demonstrating the value of a software product to the customer. It means the software provider doesn’t have to employ a slick-suited sales person and can scale the work of their t-shirt clad developers. Salesforce, one of the leading dealers of enterprise SaaS, costs their customers on average $45,000 per annum. The entry level CRM package is $5 per user but customers quickly pay more to satisfy their needs, getting more value from the base CRM product as they buy additional features and capability.

Our approach at Kansoly is the same. We’re a cloud-based telco procurement platform for businesses running RFPs and reverse auctions. Our base product is free, where we offer to run a telco RFP for you for nothing. What’s in it for us? We gain customer insights and supplier engagement, both vital for making our product better and delivering more value to our larger, fee-paying customers. Our free customers get competition for their services and cost analysis that they would otherwise have to invest in.

Brokers and consultants have always been part of the procurement landscape, but their incentives are defined by the way they’re paid. However, the development of Saas procurement platforms increasingly means that free offers aren’t always related to low-value outcomes.

Bruce Macfarlane is the founder of Kansoly, a telco procurement platform for business. Kansoly runs RFPs and reverse auctions for data, mobile, or fixed line.

Four tips for working with SMBs from the experts

Procurious caught up with Ed Edwards, Audience Outreach Manager at THOMASNET.com, to discuss his organisation’s recommendations on connecting with small and medium-sized businesses.

SMB big business

THOMASNET.com knows that it’s tough to connect with SMBs. The product sourcing and supplier discovery platform has been in the business of connecting buyers and suppliers for no less than 118 years. Recently, though, their analysts have noticed a worrying trend. “We run sourcing events through the platform”, says Edwards. “We discovered that large Fortune 500 companies were only getting a 12% response rate when they issued a sourcing event to 100 suppliers. Further investigation revealed that SMBs are increasingly unwilling to engage, and buyers need to make more effort in this respect.”

Why SMBs are important to you

Ignoring SMBs means turning your back on half of the potential supply base – in the US, 49% of manufacturers have between 5-99 employees. According to Edwards, the trend towards supplier consolidation is a false economy. “More supplier choices means less dependency, and therefore less risk”, he says.

It makes sense to source regionally from SMBs. THOMASNET.com’s research shows that 41% of organisations always prefer a local source, while 57% generally prefer a regional source. The further away your source becomes, the more risk and cost are introduced into the supply chain. Edwards explains that when things go wrong, you need to be able to respond quickly and creatively. “Local and regional SMBs can do things better with less resources at a lower cost”, he says. “They’ve got the advantage of being nimble and innovative.”

Working with SMBs is also one of the best ways to reduce costs, as there’s a strong correlation between the size of a company and the average payroll. A US manufacturer with 5–9 employees, for example, has an average payroll of $36,313 per employee, while a manufacturer with 500+ employees pays an average of $61,150. “If you only work with large suppliers, you’re going to be paying for their higher overheads”, says Edwards. “More bureaucracy equals more cost and less innovation – and more people equals more bureaucracy.”

Understand where SMBs are coming from

Small and medium-sized businesses often have an owner-proprietor and operate with limited resources. They generally need to be cautious in investing time and energy in pursuing new business, while running their existing operation. Common concerns held by SMBs around engaging with large buyers are:

  1. Can I fulfil the order?
  2. Am I wasting time bidding on an opportunity with very little chance of winning?
  3. What happens to my other business if I become beholden to a large company?
  4. What if the new opportunity becomes 50% of my business and it dries up?

Four recommendations for improving your relationships with SMBs

THOMASNET.com has worked with suppliers and buyers to create a list of best-practice recommendations for working with SMBs:

  1. Be transparent throughout the process to convey that winning your business is possible.
  • Outline your process upfront
  • Provide a timeline with milestones
  • Be specific regarding vendor selection criteria
  • Divulge who the decision makers are (if not by name, by role)
  • Convey number of suppliers under consideration
  • Provide case studies of similar relationships you have built with SMBs
  • Divulge why you are looking for a new supplier
  • Be specific regarding quantities.
  1. Simplify your process to increase the likelihood that more SMBs participate.
  • Only ask for information that is critical to the specific supplier qualification process
  • Break lengthy supplier questionnaires into smaller chunks.
  1. Humanise your process to build trust and reduce downstream confusion.
  • Leverage phone communication early in process
  • Provide specific Procurement and Engineering contacts
  • Provide feedback
    • Communicate timeline and process changes
    • Let suppliers know if they have been eliminated from consideration along the way
    • Let them know why they were eliminated.
  1. Consider shortening payment terms and offering financing to minimise your risk and ensure your suppliers have sufficient working capital.
  • Create a special program with reasonable payment terms for SMBs
  • Consider adopting a Supply Chain Finance Solution (reverse factoring).

“We’ve become very efficient at communicating in the 21st century”, says Edwards. “But at the end of the day, decisions are made when people connect with each other. That’s why I can’t stress enough the importance of humanising the procurement process if you want to connect with SMBs.”

ED EDWARDSEd Edwards enjoys educating procurement and engineering professionals on how to use THOMASNET.com’s Supplier Discovery and Product Sourcing platform to streamline and improve their work. As part of this mission, he provides customized training to organizations’ engineering and sourcing teams at their offices and online. Ed and his colleagues work together to listen to the challenges facing buyers, and help them address those issues as well as new opportunities.

THOMASNET.com exists specifically to help you find, evaluate, compare and contact suppliers for what you need, where and when you need it. Access 700,000+ North American suppliers in 67,000+ categories – create your free user account today.

*Update: Check out THOMASNET.com’s new eBook The ABC’s Of Making The Shortlist, written to help you shore up any shortcomings that may prevent you from making buyers’ shortlists and put you in position to win more business.