Understanding Markets and Opportunity Evaluation

Transcription

1 Understanding Markets and Opportunity Evaluation Slide 1 Understanding markets and opportunity evaluation Welcome to this module on Understanding markets and opportunity evaluation. Slide 2 In this module During this module we will cover: The importance of commercial & contracts input Forms of input Timing of involvement Extent of involvement Identifying & addressing risks Providing competitive advantage Slide 3 Product development Wrapping products or services with appropriate terms and conditions is a critical element of product development and marketing, it is not just a one-time activity. Throughout the product lifecycle, terms and conditions must undergo regular audit and update to reflect changing market conditions, new technologies or functions, business capabilities and customer demands. For most companies, the terms and conditions process is not as well integrated with product lifecycle management as it could be. The results of this are missed opportunities for incremental revenues or customers and potential loss of competitiveness. It may also mean chasing after inappropriate markets or customers those who demand commitments you are not equipped to meet. At its worst, inappropriate contract terms can build or reinforce negative market image for your brand and create an opening for your competitors. Slide 4 A case study Let s look at a situation involving data storage systems. These are certainly commodity products, and that s the way they were treated by product managers at one major computer manufacturer. They came to market with standard purchase prices, volume discounts and standard terms on warranty and warranty service. Performance commitments were based on the standard specifications and a standard 4-hour call-out time. Now, let s look at this from the perspective of two customers, both requiring 18 units. One customer was the New York Stock Exchange, which planned to use the systems to support and record real-time trading. This was a mission-critical application and the customer needed close to 100% availability during trading hours. That meant a comprehensive backup plan and onerous performance terms, with significant liquidated damages for failure. The 4-hour call-out time was completely unacceptable. In the other case, BP needed systems to record global financial data. It was certainly an important application, but time sensitivity was low the data was primarily to support monthly reporting requirements. The customer felt that standard service levels were too high and wanted a discount for their reduction. The 4-hour call-out should be replaced by 12 hours. Due to the standard terms, both of these situations required expensive exception handling. In the case of BP, they wanted further discounts. The New York Stock Exchange, on the other hand, having been quoted standard pricing, wanted incremental performance terms at no extra charge. IACCM 2015 Page 1

2 How might this situation have been improved? Quite simply, product marketing staff and their colleagues in contracts should have recognized market or customer segmentations and the need for different term-based offerings. The customers faced significantly different levels of risk and the smart supplier would have taken advantage of this and created distinctive approaches with prices based on service levels. This would have made them easier to do business with, potentially differentiated them from competition and not facing an uphill battle over justifying their prices. Slide 5 Best practice The real issue is that terms and conditions should at the very least support successful sales, and at their best, represent a source of competitive advantage. Too often, that is not the case. As demonstrated in our examples a misalignment between contract terms and other aspects of the sales and marketing cycle will damage brand image, create delays or lost sales, and increase the volume of disputes or dissatisfied customers. How close is your company to best practices in this aspect of term and condition management? Some symptoms you should explore include: How closely linked is your contracts group with product or service development marketing? Can you describe the differences in product or service packaging for each major customer segment and the impact that has had on the associated terms and conditions? How frequently do deals have to be handled as special bids? What are the primary areas of customer requirement that need negotiation, or where your company policies cause a no bid or rejection of customer requests? What business related issues do customers identify as sources of frustration or difficulty in dealing with your company? How many contracts result in post-award disputes? What documented process is there for regular re-evaluation of terms and conditions for each product or service? What are the typical bid and contract cycle times for each market segment? Best practice companies have clearly identified contract resources aligned to each product and service area. These resources are embedded at an early phase of development, to ensure the terms and all related business practices, policies and procedures have been considered before the product reaches the market. And they remain in place to oversee ongoing trends, special bids, shifts in product features, upgrades, new solutions packaging, changing market or regulatory, and competitive conditions. While even this is not fool proof, it certainly helps the company provide a consistent approach and avoid extensive internal confusion and case-by-case exceptions. Best practice companies have thought through the role of contracts in their marketing and business policies. For example, Microsoft may have a reputation for inflexibility in its terms and conditions. But that reputation - while it may be deserved - is likely to be deliberate. Given its product dominance, there has been no reason for Microsoft to spend time and effort negotiating contract terms. Indeed, a hallmark of successful brands is that they don t negotiate and, in general, they don t accept significant risks. So if you have unique or dominant products or services, you set the terms and conditions. Only as the desirability or unique characteristics of your brand and its products decline do you need to show real flexibility in terms. IACCM 2015 Page 2

3 Slide 6 Product Lifecycle Management Most major corporations view Product Lifecycle Management (PLM) as a key and increasingly important discipline. One phase of PLM is commercialization and in general, the linkages between PLM and Procurement are well defined. But often, similar connections with the contracts organization are either ignored or are non-existent. As a result, many products come to the market with ill-considered terms and conditions, with often highly standardized and poor alignment with customer needs. Consider these examples of product or service developments that lacked commercial discipline. Stratos Communications Technology where one major vendor licensed it only within the US for a customer wanting global communications. RISC systems with embedded code licensed from ATT and contained pass through terms that prevented customers from making modifications even to their own software! A much-heralded video and music on demand service by two major international corporations but overlooked the need to gain agreement from the owners of the copyright. All of these examples failed to draw on the sort of analysis and questioning that any experienced contracts professional should have provided. Slide 7 Contracting as a role in PLM At some companies, there are dedicated contracting professionals within each product or services group, involved from the outset and throughout the product lifecycle. This works well so long as: First they remain current with external events and pressures, thereby proactively identifying the need for, or validity of, proposed term updates. Second they have a method and incentive to work with other groups of contracts professionals to develop integrated solutions, and ensure that changes do not create major exposures to other parts of the business. How each contracts professional works varies, but those in the PLM space need greater awareness of marketing, creativity and strong analytical skills. For example, one major corporation had its commercial contracts staff trained to lead market-planning workshops. These sessions focused on the value propositions needed to achieve market success, translating them into the commitments and capabilities that would be expected by each major market segment. These commitments and capabilities were then tested against corporate policies, processes and resources to ensure that they could be undertaken, and define the risks that would result if there were failure. The terms related to a product have to be commensurate with the perceived risks associated with their acquisition or use. They must address those concerns at least as well as the competition, and potentially better, but it is a fine balance. Differentiation through terms and conditions must be seen as positive, and not because they mask a performance flaw. Products and services are acquired to do a job, not because they offer better compensation when they fail. So, contract term alignment represents a major reduction in cost, time and risk. Misalignment means lost business and frequently result in a reputation as a company that is difficult to do business with. The contracts group must champion effective risk management IACCM 2015 Page 3

4 and that means keeping things as simple as possible for both your organization and the customers. Make sure you have measures that give you early warning of eroding competitiveness. Measure indicators such as cycle times, frequency of negotiation/requests for change, sales force productivity, post award changes or failures, and of course make sure that you understand what it is that the results are telling you. Slide 8 Opportunity evaluation: Involvement First, let s be clear what we mean by opportunity. In this section, our focus is on specific bids or proposals, rather than generic market or market segment opportunities. In evaluating opportunities you should immediately looking to see if there a chance to steer or guide the bid or the terms that will be sought, and whether there is evidence that a competitor has already done this, or that the bid is being angled towards a definite winner? Just because someone else is in the driving seat does not mean that you should definitely no bid, but with an evaluation of your chances to re-shape the terms, it may determine how much effort and resource the opportunity really merits. In some organizations, the contracts group can be reluctant to engage much resource in what they see as speculative activity; they have too many live bids to handle already. That is a mistake, it sends a negative message to Sales, and they may not request your help next time around. It also reinforces one of the biggest problems faced by most contracts groups, the problem of being involved too late, when many of the terms have been set and when their role is trying to extricate the company from ill-considered commitments. Be involved as early as possible as it will make your job easier and more fun. Welcome and encourage Sales engagement even if the opportunity is still embryonic. Not only does it mean you can shape the direction and many of the terms, but you may even spot breakthrough ideas that shape a new offering. By the time there is a formal bid, such innovative thinking is often impossible. Of course, your ability to determine whether a competitor has influenced the opportunity depends in part on your competitive intelligence how much do you know about competitive offerings or the terms on which they typically operate? Without this, you start off in the dark. Slide 9 Preparation: Planning The thing that distinguishes market-leading companies is strategy and planning; they put their competition on the defensive because they are better prepared. Whether through better market understanding or through more careful opportunity assessment and selection, they ensure their product or service offerings are aligned with customer needs. At heart, what opportunity evaluation is about is determining whether or not pursuing any opportunity represents a worthwhile investment of time and resources; and if it does, what is it going to take to win? Reaching that conclusion depends on a coherent process and effective teamwork that brings together the right range of skills and knowledge. Early involvement is only worthwhile if it is going to lead to effective cooperation and planning. Building a team environment is critical if we are ever going to get past the common perceptions that Sales are just cowboys, trying to get round the system, and that Contracts are just risk-averse bureaucrats who always slow things down. One of the key benefits that flows from developing team strategy is that disagreements are kept internal. You will have worked through the issues and options before you get in front of the customer. IACCM 2015 Page 4

5 Slide 10 Preparation: Requirements In today s increasingly complex world, it is not enough to have good communications on the technical specifications; we must also engage early to define the business terms that will best meet the customer requirement. Have you ever received an RFP and found it confusing? Did it ever seem like two or even more different people had written it? You probably won t be surprised to learn that most RFPs are written by committee. That s why requirements are sometimes confusing or contradictory. Another reason is that some customers believe that they should ask for anything they could think of and see which supplier will be willing to offer the most. This may well be a valid way for the customer to proceed but it does give you a challenge. What do you really have to bid on? How do you find out? This is where your knowledge of the customer really pays off. You can approach any contacts you have within the customer s organization and validate what has been asked. Remarkably few bidders take advantage of this and sadly, most RFPs are inadequate in their explanation of what is sought. Whenever there are several rounds of well-asked questions the customer invariably finds out that they missed something important in the requirements or in the description and the RFP needs to be significantly clarified. Slide 11 Requirements, prioritization and gap analysis As we look at the opportunity requirements, a valuable technique is to avoid immediately thinking about them from your own company s perspective but instead to see the customer view. Rather than dismissing certain issues as irrelevant or ridiculous, step back and ask yourself why they are making that particular demand. Such an analysis has many potential benefits. One is that it may direct you to specific questions you now want to ask. Another is that it creates a more positive, solution-seeking environment within the team; and a third is that it may lead you to insights and ideas for added value solutions or competitive differentiation. This analysis may also help you estimate the customer s priorities and weightings, or to confirm why they selected the things they did. From there, you can begin to identify where your capabilities meet or fail to meet the requirements. At this stage, opportunity evaluation teams can often fall into the trap of focusing only on those gaps where they have a shortfall in capability. That is a serious omission. Having too sophisticated a capability can also be a problem because it often means you will have higher prices. For example, if the customer wants only 96% availability, but you offer 98% as standard, does that mean a lower performing, lower price competitor might win? Slide 12 Financial impact Now that we have the requirements and prioritized and determined our ability to meet these, we are finally ready to analyze the financial impact. One of the most obvious financial areas to analyze is the profitability of the deal. Fundamental to any analysis is the cost of meeting specifications. Then, the risk you assume in selling a product or undertaking a project should be assessed as this has a cost impact as well. It may be big enough that you may not even want to respond. Or you may want to ignore portions of the bid. However, the risk can usually be covered by other measures such as insurance, over-specifying a product, performance bonds and so forth. Once again, this usually translates itself into additional cost, which can be used in the financial analysis. No financial analysis would be complete without the whole team analyzing the effect of competition. A financial person may well make all of their calculations based on factors already mentioned. They may conclude that this translates into a certain needed price. IACCM 2015 Page 5

6 However, the salesperson may know what the competitor is willing to do and whether the price is likely to win the bid or not. An engineer may determine that the product plan assumed that a large sale could be made to this customer and if it is not, the cost will not be absorbed over the remaining anticipated sales. The final decision on what to bid will have to be made taking into account all of these factors and so it really does need to be a team decision. Slide 13 Financial impact Take a moment to complete the task on screen. Slide 14 - Financial Impact Answers Let s take a look at the answers. Slide 15 Risk assessment; Liability Because liability risk is a huge topic, we will not attempt to list all the various types of liability. When looking at all the different ways a supplier may become liable it can be frightening. There are physical third-party liability risks where employees or products could cause physical damage to a client, their customers, or the general public. Liability includes the possibility of consequential damages where the failure of your offering may cause your customer substantial loss. Many RFPs now contain language that will hold you legally responsible to the terms of your bid response even before contract negotiation. It is essential that your Legal advisor review the bid response. Some suppliers have responded by striking out the language that would hold them legally responsible before a contract is enacted. Customers usually view this tactic as evasive, believing that the supplier lacks confidence in its offering and that they may even be lying! Slide 16 Risk assessment; Non-performance The risk of non-performance is usually anticipated in an RFP and any subsequent contractual agreement. It is usually expressed in the warranties, service levels, remedies and damages section of an RFP. They are properly called remedies, but you may sometimes hear them referred to as penalties, although a court of law will tend to take dim view of that term. Typically if you fail to perform according to an agreed level you will be asked to make some kind reparation or restitution. You will probably be given a certain period of time to cure, i.e. either fix the problem or make the restitution. This can be expressed as paying a non-performance fee, providing more resources, providing a higher specification product, additional services, etc. These can generally be accommodated in your response by assessing the likelihood of failure and the cost of making the reparation. However, you may sometimes see a requirement for a non-financial remedy. One example was where an RFP required the winning bidder to guarantee that should the failure of any provided equipment result in the serious injury or death of a crewmember, the president of the supplier would visit the family of the deceased, attend the funeral and write a public advertisement that their equipment was responsible for the injury or death. Your team will probably need to assess such non-financial risk in good will terms. IACCM 2015 Page 6

7 Slide 17 Risk assessment; Regulatory compliance There is a growing worldwide trend towards increased governance regulation. In the US, certain provisions or protections are increasingly being sought at early phases of vendor qualification. It is equally certain that, as a supplier, you need to be sure that the customer s demands will not cause issues with compliance. For example, in their ignorance, a customer may be demanding terms that contravene European competition laws, or data protection regulations. Or they may be looking for risk provisions that would cause serious concerns with the need to report under SEC regulations, or payment terms that create conflicts with revenue recognition requirements. As a contracts expert, you must be alert to all these things and you may have to educate both the account team and the customer. Usually your Legal representative will assist that assessment, and with the recent increased focus on this area, your company may have a Governance Officer who you can consult; so you should not have to act alone. Slide 18 Risk assessment; Enterprise risk / consequences of failure While enterprise risk may not be directly contained in an RFP, it is there nonetheless. What will be the consequences to your company reputation if your product is not adequate for the task? How influential is your customer in the industry? Is there a possibility that your customer may misuse the product? And in responding, what terms might enhance or damage your reputation? Remember, there are no secure secrets ; don t believe that you can make behind the scenes deals with a specific customer and that this will not reach the ears of others. On the other hand, if this is a leading-edge opportunity and your company does not win, what might that say about the quality or innovation of your business? How might that affect future standing and competitiveness? Closely related to enterprise risk is the risk of failure. If your offering fails totally what are the consequences? Are they just financial? Reputation? Will it affect other product plans? Or maybe will it help you in some way through the lessons learned? Slide 19 Risk assessment; Non-response It may be that after assessing the risks, evaluating the opportunity or calculating the bid effort you decide that you do not wish to bid. This can be perfectly reasonable and acceptable. However, before you do, ask yourselves certain questions: What will be the impact on your relationship with the customer if you no-bid? What will be the marketplace perception of your no-bid? In what way will you communicate your decision? One option you may have is to find an alternative way of answering the bid such as a subset, a short form or a different proposal. Be careful that this does not inadvertently reduce opportunities for future business. Non-response is rarely a good thing (unless you are truly not in that business or none of the bidders respond). Even an unlikely bid, depending on the competitive circumstances, can be rewarded with very lucrative business. Slide 20 Risk mitigation The following is an example risk mitigation process. Encourage all members of your team to participate in the risk identification activity. Ask them to identify all concerns and issues whether they consider them risks or not. Once identified IACCM 2015 Page 7

8 the risks can be analyzed using Strengths, Weaknesses, Opportunities and Threats or SWOT methodology. The next step in the process is to plan the actions to be taken. While they may not be incorporated into the RFP response itself, document any contingency plans for: Product design or process changes required Any negative consequences you are prepared to accept Any plans you have to study the risk further. Once the plan is crafted, a tracking methodology needs to be detailed to clearly identify who will track what, when and how it will be tracked and reported. The next step is to plan for control. This is generally classified as Project Management. We need to identify who the project manager will be and, as much as possible, how the project and any deviations will be controlled. After completing the previous steps, their outputs must be communicated. This should be approached both before and after the response to the RFP. Seek the input and approval of anybody within the organization affected by this project. Slide 21 Evaluating the relationship How you respond to an RFP and how you evaluate the opportunity needs to be done in the context of your relationship with the customer or prospect. Have you done business with them before? Do they value you or not? Do you understand how they will decide the winning bid? There is no substitute to knowing your client. The more you know about how the decisions will be made, who the decision maker is or are, what the underlying struggles between various interest groups are, the better you can craft a response that is likely to win. This is probably the biggest responsibility of the Sales team, but everyone involved can contribute. With a little bit of effort the organizational structure of a company can usually be found out. You can often get printed organization charts from clients just by asking. They are sometimes published in business publications, or even by searching the web. Knowing who reports to whom and who really issued the RFP can be tremendously useful. Even more useful but sometimes more difficult to obtain is the decision structure. Occasionally one person will make the award decision. In large organizations, it is more likely that there will be several people involved in making the decision with some wielding more influence than others. It is extremely useful to have a good understanding of this. You obtain this information through your contacts and relationships. Sales people on your team are going to have the primary responsibility to make contacts with customer personnel and establish good relationships. However, ANYBODY in your organization can contribute. Your engineers may be making regular visits to the client for service and have gained a good understanding of what happens inside the organization. Your accounts receivable clerk may gather interesting information in his conversations with their Account Payable. Slide 22 Evaluating future opportunity Finally, before you feel ready to answer the RFP, this is a good time to reflect upon future opportunities. There are two reasons for this. One is that future opportunities may influence how you want to respond to the bid. The other is that this bid may contain opportunities to sell more now. For example following award a customer reported that they had chosen a bidder who was not the least expensive. The bid made them look at services they had never considered or IACCM 2015 Page 8

9 realized that they would need. They felt that the bidder had a really good grasp of their true requirements and would be the better supplier to help them meet their future goals. Such an opportunity may be contained right in the RFP. The client may put in indicators of what their follow-on requirements are. They may even ask for any other ideas the bidder has. Your bid team should carefully examine these opportunities and decide how much you want to factor them into your response. Even though the bid may not request it, you may have additional products or services that the customer could use. You may even have a different approach that the customer has not considered. However, if you do have a different approach, even one that is better than what the customer has asked, do your best to respond to the RFP exactly as asked. Your customer may not recognize the superiority of your approach and disqualify you without any further explanation. Consider incorporating an addendum to the proposal as a way of giving the customer an additional option. Ask about the likelihood of future business, formally through the questioning procedures in the bid process. You can also find out by using the customer contacts and relationships we discussed. You can ask what the future business would look like. You can suggest what it could look like. Once you get the feel for it you can also ask whether the client is prepared to commit to the future business if you win the bid. Slide 23 Exercise Take a moment to complete the task on screen. Slide 24 Exercise Answer Let s look at the answer. Slide 25 Next Steps This concludes our Module. Please take the time to complete the Module Feedback. Once you have completed the Module Feedback, we recommend that you go to the Attachments to review the additional information. A Module Test is available for you to take in order to check your understanding of the material or practice for the Certification Exam. The required pass rate for all Module Tests is 80%. You may take this test as many times as you wish: please allow 24 hours between each attempt. Once you have passed all the Module Tests with at least 80% you will be invited to take the Certification Exam. IACCM 2015 Page 9