The following article is an excerpt or derived from Selling Outsourcing Services by Grant Lange.
Procurement continues to play a critical role in the evaluation and selection process for outsourcing services, particularly when selling to Fortune 500 companies. To that end, procurement representatives engaged in the negotiation process should be treated as a legitimate stakeholders and their level of influence should not be understated.
The Evolution of the Fortune 500 Procurement Organization
Over the past few years, there has been a fundamental change in the way Fortune 500 companies procure consulting services. The net effect of the change is that Fortune 500 clients, regardless of industry or geography, have become much more sophisticated buyers of management consulting, technology, and outsourcing services. This new level of sophistication has broad implications for the negotiation teams who are at the center of this transformation. In this chapter, we focus on the evolution of corporate procurement organizations and the resulting environment that a service provider is likely to encounter during the sales and negotiation process.
Historically, selling services to Fortune 500 entities was straightforward. A service provider would identify a potential consulting opportunity, propose its service offering to the prospective client, agree on the scope of work and corresponding price, execute a contract, and begin service delivery. Procurement organizations were extremely decentralized, functional and geographic leaders had complete autonomy over their external consulting budgets, and service providers were routinely engaged at different points in the corporate hierarchy and across multiple business units in the organization. Given this level of procurement decentralization, coordination of third-party consulting expenditures was nominal, at best. Multiple agreements, many with conflicting pricing structures and delivery terms and conditions, could prevail at any one time. Because of the significant size of the third-party consulting expenditures in many Fortune 500 companies, in some cases in excess of $100 million annually, this process was clearly inefficient and yielded an extremely suboptimized procurement and performance management process.
To combat this trend, Fortune 500 companies across all industries and geographies have undertaken efforts to centralize and streamline their procurement processes, particularly as it relates to the utilization of external consultants. To that end, they have instituted a much more sophisticated buying methodology and have migrated toward a very centralized procurement process under which global master services agreements are executed with a select group of preferred vendors. Through this process, the typical Fortune 500 company strives to optimize its global consulting spend and to share best practices among operating entities through:
- Streamlining the vendor base
- Comprehensive use of master services agreements and identification of “preferred” vendors
- Institution of a more rigorous and disciplined buying process with aggressive negotiating tactics in pricing, and terms and conditions
- Implementation of a vendor performance management system
Sitting squarely at the intersection of this new strategy is corporate procurement. The bottom line is that the relative influence and power of corporate procurement organizations have grown significantly in recent years, and these organizations have been empowered—through chief procurement officers reporting directly to the CFO or CEO—to aggressively pursue their agendas. Given this ever-present market dynamic, prudence requires that sales teams develop a strategy by which corporate procurement organizations are leveraged to help facilitate business development and footprint expansion. To this end, it is critical that procurement understands your value proposition, your global scale, your full consulting life-cycle delivery capabilities, and your ability to help clients achieve predictable results in a timely and quality manner under terms and conditions commensurate with the nature of the services provided and priced competitively with the client’s other preferred vendors.
[pullquote align=”right” class=”” cite=”” link=”” color=”#FFA500″]It is critical that procurement understands your value proposition, your global scale, your full consulting life-cycle delivery capabilities, and your ability to help clients achieve predictable results in a timely and quality manner under terms and conditions commensurate with the nature of the services provided and priced competitively with the client’s other preferred vendors.[/pullquote]
Procurement’s Underlying Interests
If procurement fails to reach these conclusions and, in particular, if it believes that a particular service provider is not cost-competitive, then business development, footprint expansion, and the negotiation process will be a steep, ugly, uphill battle. I was recently engaged in a competitive applications outsourcing procurement. Procurement’s role was to continually provide red-laden heat maps that reflected the extreme variances between the rates my organization had proposed and procurement’s perspective on market-relevant rates for similarly situated services. Although the rates that we were benchmarked against were not legitimate, procurement’s continued reinforcement throughout the sales cycle that the rates were not competitive turned that perception into a reality that was too powerful to overcome. As a result, an award to a lower-cost, India-based outsourcing services provider came shortly thereafter. To avoid disqualification as a result of a flawed benchmarking exercise and to work effectively with Fortune 500 corporate procurement organizations, it is important to understand what they want, what motivates them, and what they are trying to achieve. The agenda of the typical Fortune 500 procurement organization are not that much of a mystery. Specifically, these organizations want:
- Optimization of global consulting spend and sharing of best practices across their organizations.
- Fewer and more strategic preferred vendors with broad delivery capabilities.
- Vendors with “skin in the game.”
- Aggressive pricing (OK, as cheap as they can get), with volume and other discounts in exchange for the “preferred” vendor label.
- Pricing structure commensurate with the nature of services provided and competitive with the other preferred vendors—separate rate schedules for management consulting, systems integration, and outsourcing engagements.
- Vendors that deliver best value—timely, high-quality, and cost-effective delivery.
- Competition among vendors for commodity-like services.
- Increase in compliance and reduction in “maverick spending.”
- Efficiency gains (reduced cycle time), cost savings, and control over the buying process through implementing e-procurement solutions.
- Performance management systems in which vendors are evaluated across quality, time, and cost parameters, and stripped of the “preferred” label if they fail to meet performance standards.
- Business and legal terms and conditions that yield an acceptable level of risk and reward.
While procurement wants to achieve each of the aforementioned agenda items, never underestimate the importance of aggressive pricing. All these agenda items are important, but procurement organizations are motivated by and recognized and rewarded for obtaining cost reductions from their vendor community—hard stop. Think about it: Who doesn’t want to go back to their boss, most likely the CFO, and wave a flag that says they were able to negotiate an additional 5 percent discount from one of their largest preferred vendors? Even though 5 percent may seem nominal, the savings can become significant, given the annual transaction volume being generated with large IT service providers.
Can I Just Ignore Them and Pursue My Alternative?
Most business development or delivery executives want to avoid procurement during the sales and delivery process. This might have been a viable approach ten years ago, but this is no longer true, given the overarching influence procurement has in the buying process. Until recently, many brand-name strategy providers chose to pursue their alternative, avoidance, when building relationships with and aligning their sales strategy with procurement. That is to say, they leveraged their relationships and sold directly to the C-suite. This alternative was viable when third-party consulting and technology spend were below the radar. However, the recent trend is to focus on centralization and to leverage global purchasing power, with a corresponding reduction in selling, general and administrative (SG&A) expense that is being sponsored by those same C-suite executives who embodied the alternative strategy. The new mantra has become: “the relationship matters, but it is the deal that counts.”
Given this dynamic, it is much more prudent for you to craft and pursue a sales and delivery strategy that aligns with procurement’s strategic agenda and focuses on attaining preferred vendor status, being accountable for delivering on your value proposition, and partnering with procurement for success. To that end, it is imperative to include procurement in your power map and manage those relationships in a manner consistent with other key stakeholders that may influence the buying decision.
The current trend is no passing fad, and the bottom line is that procurement, while considered by many to be the Evil Empire, can be a valuable ally when you are selling outsourcing services to Fortune 500 companies. Irrespective of your strong brand awareness, trusted advisor relationships, and successful delivery history, it is imperative to build upon existing relationships and establish new ones with client procurement organizations, because they can serve as your ally across their buying community. The current procurement landscape gives them significant influence in the buying process, and it is, therefore, critical that they understand the depth and breadth of the capabilities that the service provider brings to bear as well as its value proposition.
Just How Much Influence Are We Talking About?
The short answer is: a lot. When it comes to compliance and control, Fortune 500 procurement organizations have implemented stringent policies on engaging third-party service providers, and these policies are endorsed deep into the C-suite. These policies typically include provisions such as the following: approval thresholds that escalate, depending on the dollar materiality or complexity of the engagement; the number of bids that must be solicited before an award decision can be made; and limitations on change orders, and the penalty for noncompliance can be significant. These policies place procurement right in the middle of the contracting process for third-party providers and give them broad enforcement powers both during the selection process and the delivery term.
As for gauging delivery quality and instituting penalties for poor performance, the trend in Fortune 500 entities is to implement a structured process by which delivery success is evaluated across time, quality, and cost parameters, and is reviewed quarterly with the vendor. By using such an approach, procurement can measure the quality, timeliness, and cost-effectiveness of delivery, and gauge the effectiveness of its service providers based on a consistent set of objective, measurable, and verifiable criteria. Ultimately, such data can be used to remove a service provider from the preferred vendor program, to exclude it from a new opportunity, to terminate its agreement, or justify the basis for a new sole-source award.
What About the Pricing Discussion?
Procurement organizations are measured by and want to be recognized for optimizing third-party consulting expenditures. They pursue these objectives by putting extreme downward pricing pressure on their vendors to attain favorable pricing, particularly in those areas where they believe that the services provided resemble commodities. As we all know, they can be relentless in seeking additional price concessions from their service providers. Their rationale may be motivated by their belief that they can obtain a similarly situated service at a more favorable price from an alternative service provider or that they have an internal mandate to achieve cost savings. And the current economic climate and continued focus on reducing IT spending has only made Fortune 500 procurement organizations even more aggressive in the negotiation process. They now look for significant across-the-board discounts, irrespective of the brand awareness, reference base, and reputation for timely, quality, and cost-effective delivery by their vendors. In many instances, these requests may come well after the initial agreement has been executed and service delivery has begun.
With respect to outsourcing services, the market has changed drastically in recent years. There used to be a significant gap in delivery acumen between the most highly regarded Tier-1 service providers—Accenture, IBM, and Capgemini—and their India-based pure play competitors. However, that gap has narrowed to where most clients believe that they can obtain the same quality and predictable results from either source. In the past 10 years, the largest Indian pure play providers—TCS, Cognizant, Infosys, Wipro, and HCL—have increased their global market share and geographic delivery scope and enhanced their delivery acumen. The term “pure play” really no longer applies as they have expanded their service offerings across the consulting lifecycle. This commodity-based view of the outsourcing marketplace has resulted in price becoming one of, if not the most important, criteria in the evaluation and selection process.
While each request and solution is different, the following principles can reinforce the legitimacy of your initial pricing submission and can serve as the foundation for responding to any such request:
- Make sure that the client is paying premium prices for premium services and that the prices the client is paying for commodity services are competitive with other vendors in the marketplace.
- Don’t assume strong relationships will justify an award to a higher priced service provider.
- Be mindful of the client’s ability to make an award to other than the lowest priced service provider. Once a relatively small price premium threshold is crossed, the client’s ability to do so will be limited.
- Be smart: If you agree to a price concession, it questions the integrity of the initial price submission. Always be cognizant of the fact that if your client does not trust you, then you might as well pack up and call it a day.
- If you decide to give additional incentives, concessions, or discounts, make sure you are getting something in return—a volume commitment, preferred vendor status; access to the C-suite or to certain procurements historically reserved for other competitors; exclusive marketing rights to a particular entity or region; more favorable payment terms; changes in roles, responsibilities, or scope; or the elimination of high-risk terms and conditions. But make sure you get something in return, and consider all possible options if you pursue this course of action.
- When you have given all that you want to give and believe that your rates are competitive with those of other vendors in the market for similarly situated services and reflect the level of risk associated with delivery, then remain calm. Hold your ground, focus on your value proposition, make it clear that low price does not equal best value, consider your options and alternatives, and be prepared to say “no.”
The Master Services Agreement: Friend or Foe?
A key component of the more sophisticated buying methodology has been the migration to a model under which global master services agreements are executed with a select group of preferred vendors. The master agreement typically contains the terms and conditions as well as the rates that govern delivery for all services across the consulting life cycle. Through this master agreement process, Fortune 500 procurement organizations hope to make progress in achieving three items on their agenda:
- Identifying a preferred vendor community that delivers in a timely, quality, and cost-effective manner.
- Developing competition among vendors for similar services.
- Securing business terms and conditions that yield an acceptable and predictable level of risk and reward for their organization.
Many sales and delivery executives have expressed some concern about the migration to the master agreement process because they see it as inhibiting the sales process. A viable option is taking the opposite approach and strongly supporting the execution of a master services agreement with every client with whom you are currently engaged and for which you have growth aspirations. The biggest challenge that many services providers face in this area is negotiating a master agreement that contains terms and conditions that can be tempered or flexed so the terms are commensurate with the underlying nature of the services provided—consulting, systems integration, or outsourcing. Thinking about future opportunities can be challenging because the master agreement is the starting point in most relationships, and its focus is on the initial opportunity contemplated between the parties. This agreement also drives the process, substance, and options being developed from the perspective of both terms and conditions, and rates.
Given this dynamic, it is critical to focus not only on the initial underlying opportunity but also on the development of a sustainable agreement with a rate structure and governing terms that can span the full consulting life cycle. I cannot tell you how many times I have been engaged to take a master agreement that was executed for the delivery of management consulting or systems integration services, and amend it or create an addendum to include outsourcing services under its umbrella. What may sound like an easy exercise is challenging, because clients seek to maintain a firm grasp on the consulting-like terms in the master agreement, whereas the services provider seeks to introduce terms specific to outsourcing services. To avoid this dynamic, take the time to execute a robust master agreement that can span the full consulting life cycle.
Although the master agreement negotiation process may be cumbersome, the benefits received upon contract execution are significant. The master agreement is a free hunting license and communication mechanism, so use it accordingly—walk the halls, talk to procurement and potential buyers, conduct brown bag sessions, provide sales collateral, promote your capabilities on the procurement intranet website, and participate in other activities that educate the buying community and facilitate footprint expansion. In addition, a robust master agreement can accelerate the sales cycle, given that the delivery terms and conditions, and the rate structure, have been previously negotiated. Of primary importance is that the master agreement gives you a reason to meet with your clients and stay relevant, even if there are no immediate opportunities on the horizon. Finally, it can facilitate expansion into other service delivery areas over the consulting life cycle. Holding a master agreement comes with good visibility and can contribute to building brand awareness, an internal reference base, and a reputation for quality delivery across the organization.
What Does the Landscape Look Like Going Forward?
Gone forever are the days of decentralized procurement, multiple engagements with disparate terms and conditions and pricing structures, limited performance management, and purely relationship-based selling. Both procurement executives and clients are seeking innovative solutions and options from prospective service providers that embody a better, faster, and cheaper approach. In addition, both clients and procurement organizations are looking for alternatives to some of the entrenched providers and stagnant solutions that they have been subjected to for many years.
As we have discussed, the corporate procurement organization has changed drastically. It is now centralized, more sophisticated, and very influential in the buying process. It is focused on streamlining its vendor base, executing master services agreements that govern delivery globally, and anointing a limited number of preferred vendors across a set of discrete service lines. All of this has been done to optimize and leverage the global consulting spend, and to hold preferred vendors accountable for timely, quality, and cost-effective delivery.
Given the staying power and level of influence wielded by procurement, my recommendation is that you build on existing relationships and establish new ones with client procurement organizations in the same manner and with the same rigor as you would with your ultimate client. These organizations can be your allies across their buying community. Take the time to make sure that they understand your value proposition, your ability to deliver in a timely, quality, and cost-effective manner, and the depth and breadth of the capabilities that your organization brings to the marketplace. At minimum, such relationships give the service provider insight into the RFP process, enhance its competitive positioning with new buyers that seek counsel from procurement about vendor capabilities, and help enhance brand awareness.
The current economic climate, extreme downward pricing pressure, and desire for consistency in operations will most likely enhance procurement’s power base and level of influence. Given this trend and for the aforementioned reasons, embracing the concept that procurement can be your friend and ally as you navigate through your respective client community is highly recommended. Ultimately, this approach can yield footprint expansion, insight into a previously noninclusive RFP process, enhanced marketing opportunities, new master services agreements with preferred vendor status, introductions to new buyers, and, most important, generation of net new sales. When you are developing account plans and strategy, remember that procurement can be your friend and engage them accordingly.
Liked this article? Read the full book: Selling Outsourcing Services by Grant Lange.
About the Author
Grant S. Lange is an IT services sales and delivery executive with global experience negotiating large and complex application, infrastructure, and business process outsourcing agreements within the public and private sectors.
During his career, he has negotiated outsourcing agreements that have generated in excess of $2 billion in new sales. He is a partner at a leading IT services company and has served in a variety of leadership roles at some of the world’s largest IT services, advisory, and software firms.