The best revenge is success!

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What still resonates with me 10 days after the Super Bowl

Yes, like many of you I’m adjusting to the gap between the end of the football season and the start of baseball. This year, though, I’m still thinking about the Super Bowl and the leadership it takes to succeed in adversity. While faced with adversity, several players in the Super Bowl had been cut from their former squad’s mid-season and, of course, Tom Brady was suspended for 4 games. Against all odds, after a blowout 1st half, the Patriots team maintained a steady head and won the game.

I listened to a Terry Bradshaw interview with Tom Brady about leadership and it really made me think. His attitude was incredible. He indicated as a leader you are the one person that can motivate he team, if you persist you will succeed, and the team will believe that they will succeed. If you come to the huddle defeated and down, the team will also reflect that feeling. The team executed a flexible strategy, stayed motivated and overcame unbelievable odds.

The leadership lesson we can all take away is that a steady leader with a flexible strategy, motivated team and steady execution of the strategy will succeed against all odds.

The best revenge is success! Congratulations to the Patriots!

Are you down for the count or on a steady course to win?

Negotiating with Consultants – the insider perspective

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In the indirect category one of the tricky negotiations is consultants. In many cases, they are brought in at high levels of the organization for their specific expertise. Often they have already been awarded the job and are ready to start the assignment with the contract being the cleanup details. Has this ever happened to you? In this blog I’ll give you hints to improve negotiations with consultants.

The types of consultants will vary by specialty and market. It’s important to understand that all consultants are not strategic. Let’s look at a way to determine types of consultants.

types-of-consultants

In Pillars 1 & 2, the power rests with the hiring company and can be tactical in nature. For Pillars 3 & 4 the consultants often have the power and the negotiations must be more strategic, outlining the principles around the engagement and the relationship. The larger firms relate fees to the value perception of the customer rather than a cost-based formula. The consulting firm typically deals with the prospective customer’s senior management and provides several options for solving business issues. Many of these options will be conceptual, leaving the project details open to be negotiated. The key cost drivers for the consulting firm are margin goals, staff utilization and opportunity cost, which are presented to the prospective customer as staffing for the project and timeline.

Pricing methods
The decision on pricing methods depends on the nature of the agreement and whether a performance element is involved. This can also be tackled on an assignment-by-assignment basis. The options for pricing are to develop a structure not linked to performance or link consultant performance to milestones and deliverables.

Options include:

-Pricing not linked to performance. Approaches include:

  • Hourly rates, daily rates, weekly rates, monthly rates
  • Differential rates: partners, seniors, juniors
  • Fixed fees: annual, monthly, weekly, project [turnkey contract]
  • Retainer fees

-Pricing linked to performance. Approaches include:

  1. Performance lump sum pricing—the parties agree a charge for work that will achieve a specified target. The service provider works whatever hours are necessary to meet the target.
  2. Target pricing—the parties agree a price for performing a task or for meeting a target based upon estimated days at a nominal daily rate. A sliding scale may be applied if the actual days are more or less than estimated days:
    1. Fewer days warrant higher per diem rate
    2. More days warrant a lower per diem rate
  3. Performance fee—the partners agree a mix of charges between daily/project rates, retainer fees and a performance fee based on an agreed quantum, linked to specified deliverables.
  4. Milestone based fee‒A fixed fee based on a retained with milestone payments and performance payments based on deliverables is achievable, although the consulting firm may resist this option.

The consultant may offer a performance only fee since some managers like for the consultant to have skin in the game, but there is usually a dispute at the end of the assignments about who had the idea, when was the idea generated, the ideas the company does not want to implement and who ultimately has accountability for either product or supplier failure. One of my assignments generated over $400,000,000 in savings; if there had been a 30-40% gain share (the typical rate), the client would have been unhappy with the payment even though the value was achieved.

Key negotiation tactics
Staffing the project:

The first consideration is to understand who is staffing the project. The negotiator must dig into the background of each consultant and understand their capabilities roles, accountability and responsibilities. It’s essential at the start of the project to define what work will be assigned to each level of consultant. It’s also important to negotiate the role of the managing consultant and the time that will be spent on the project.

Caution–Bait and Switch: One thing that some larger consultants do is start the project with a top-class team then remove the team and replace it with lower level people once the project has started. It is essential that the negotiator insists and documents that the players that start the project will remain through to the completion of the project.

Pay for Performance:

The key part of the program revolves around the project scope, milestones, deliverables and time line. All of these must be detailed in the scope of work (SOW). The negotiator should develop a series of progress payments and incentives for meeting the project deliverable rather than a time and materials contract. The goal of any successful consulting assignment is one where the deliverables are met and the company succeeds based on the work done. The negotiation is all about achieving value for money and performance.

Caution–Resistance to performance payments: Many consultants are not held accountable for meeting all of the project deliverables and will extend timelines with scope creep as a way of increasing revenue and finding other areas to extend their longevity in the business. Milestone and performance payments keep the consultants efficient and focused one the task and deliverables at hand.

While we focus on fees, it is much more important to quantify the objectives and deliverables at the front-end of any assignment. Unfortunately, the stakeholders are trying to quickly address a business issue and are unlikely to want to dig into the detail. As procurement professionals, it’s our job to educate and influence stakeholders to ensure that the service being provided meets the expectations of the company at the agreed fee rates. Performance payments and a team that remains with the assignment from the start will take you far.

How do you negotiate with consultants?

Made in the USA vs. Free Trade – it’s complicated

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While watching the news this week, my wife Linda asked me “Are you a true believer in free trade?” As I thought of a response, I was reminded of why manufacturers began to leave the USA. Yes, many were chasing low labor, but the reality is that many companies were chasing quarterly earnings while operating out of post-World War II factories with limited investment. Abroad, the companies were investing in new plants with updated capital, automation and driving low manufacturing cost as well as having low labor costs compared to the US.

In my corporate procurement and supply chain career, I’ve worked for organizations that had short term focus, lack of (or misdirected) investment and poor strategy. Unfortunately, some no longer exist. The point is that tariffs and duties on imported goods alone will not save US manufacturing. Being the low-cost producer involves investing in the future and developing sound business strategies; that is the key to surviving and thriving.

Free Trade will drive buyers to the low cost, efficient suppliers wherever they are. The high cost, inefficient suppliers can be propped up by protection, but are not likely to survive in the long term. Some supply chains, like the electronic industry, have made the long-term investments elsewhere and have already achieved technology advances, low cost and may never return to the US. The automated factories that return will require different employee skillsets than the industries that left the US and we may not have a ready labor force if manufacturing is reshored.

As procurement and supply chain professionals, we need to develop all suppliers to be efficient, operate at the lowest cost and invest in innovation and automation. I believe that sound strategies, investment and a commitment to the future will lead to the most competitive suppliers, wherever they are located.

It’s a complicated question:

Do you believe in Free Trade?

The New Anti-Trade Movement and Your Supply Chain – risk or opportunity?

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Since ancient times, trade deals have been struck with foreign countries. You could say that trade and tax were the spark that has ignited revolutions and wars.

The promise for the US to abandon the Trans-Pacific Partnership, coupled with the UK vote to leave the EU and change trade agreements across Europe, is raising concerns and signaling an anti-free trade sentiment. Free trade advocates are disappointed for sure and the future is uncertain.

The political climate has changed, bringing more focus on a reshoring movement in the US. Many of us in procurement were driven to support low cost country sourcing. Whether moving sources back to the US or with the potential of tariffs, duties and increased fees, our strategy and profit plans could be at risk.

While we don’t know what will evolve in terms of the future of trade, there are opportunities and risks. The opportunities will be presented if the US renegotiates trade deals to take advantage of the ability to drive US exports. The risks come if trade deals do not happen and increase costs to protect US manufacturing hurt the bottom line. I’m advising my clients to:

  1. Review all internationally sourced components
  2. Understand the strategic nature of all of the internationally sourced categories
  3. Identify opportunities for alternate sourcing
  4. Understand items with high capital investment and technology as a driver (and the implications of not being able to switch suppliers)
  5. Create a currency strategy
  6. Drive best value sourcing

It’s always better to be prepared than surprised.

What’s your plan?

Commodities Could Be Trouble in 2017

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Have we been lured into complacency with commodities that have fallen over the past year impacting cost of major raw materials and our profitability? With corn over 40% down, copper 38% down and wheat more than 30% down, it is apparent that we have enjoyed significant market opportunities. Having traded commodities in my career, I know that commodities run on a cycle and the good times may be close to an end. A good example of commodity cycles is peanuts, where prices rose 33% in 2016, but bumper crops were expected in the current season, which should drive prices down. Today in the Spend Matters guest post US Peanut Prices Increase More Than 30% in 2016, Mintec noted persistent rains in China have caused high moisture levels in the peanut crop, which will greatly affect quality and price.

In a Bloomberg report on Barclays Black Swan Threats to Commodities, there is upside risk for raw materials in 2017 and the likelihood of further upside risk based on radical changes in the global economy, energy markets and global political risks on trade. Another dynamic that could impact all buyers involved in international trade is the opportunity and potential for disruption and risk posed by currency. With Switzerland announcing that it’s abandoning its peg to the Euro, the unknown impact of Brexit and China changing how exchange rates are fixed, it could signal volatility.

In many companies, procurement and finance have a joint obligation to protect the company’s profit plan. The goal of managing commodities and currency is not to speculate, but to assure the profitability across the organization is maintained. If you’re planning a commodity or currency strategy, here are three approaches to consider:

  1. Cover 70 to 80% of the plan, leaving 20 to 30% flexibility to move with key markets
  2. Develop formula-based pricing levels
  3. Work with finance to build currency hedging by buying foreign currency or by changing contract pricing to US dollars

It does make sense to look on the horizon for any currency or commodity that might pose potential risks and build the plan prior to any change in market pricing. There is no doubt that 2017 will bring a new frontier to global trade and it’s best to be prepared, rather than be surprised.

How will you manage volatility should it arise?

5 Keys to Success for CEOs

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Happy New Year! The new year is always an opportunity to reflect and, since I have the opportunity to work with many businesses and CEOs, the past few days I’ve thought about what makes a CEO achieve excellence. Considering what I observed the past year, here are 5 keys for business success.

  1. Companies cannot just cut expenses to achieve profitability. They must grow the top line, develop innovative products, meet marketplace demands and focus on growth.
  2. Any organization that lacks a clear and simple strategy is like being lost in the woods without a GPS; the organization must have a clear focus and understandable direction.
  3. The key to any business is its customers. It is essential to know who the customer is, what they need and want. Without a clear focus on the customer the business is subject to fail or significantly lose market share.
  4. Employees must know the industry, market, have sensitivity to competition and digital disruption and be able to rapidly react to changes. This requires leadership, talent management and clear communication of goals and objectives.
  5. From the top down, the leaders and employees of the organization must display integrity at all times. It is unfortunate when the leader of the organization lacks integrity; it cascades through the organization.

Boards of Directors have a duty to ensure the survival and health of the organizations they serve. I am on several Boards of Directors and I hold the organizations to these standards. I also use these as key considerations when engaging in new client relationships.

What do you think is key to business success?

Reward and recognition – the neglected tool for successful teams

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It is surprising just how many corporate executives fail to understand that it’s the simple things that make a difference.

Whenever I am working with the indirect expenditure in client organizations, I build cross-business, cross-functional teams. These teams are given clear objectives and goals and asked to build a team charter outlining their mission, roles, responsibilities and accountabilities. In many cases, the teams are launched with some training and development and a mission to gather data. Within 4 weeks, the team returns to make a presentation to senior executives outlining the mission, goals savings opportunities, risks and strategies. For many of the team members, this is their first exposure corporate executives.

Once approved, the team is given 4 additional weeks to bring the project plan back and an implementation team will be assigned. I also suggest that individual performance reflect the team performance so everyone has a stake in the game. The teams I’ve worked with have delivered cost improvement, process improvement, risk reduction and in many cases, increased shareholder equity.

When complete, I suggest the executives reward the team. They are normally surprised and many have asked me what should the reward be. I always say anything that recognizes that the team worked on the project in addition to their regular job, fostered collaboration and brought extraordinary results to the business. The reward is never about money, but always about a recognition that there was a major contribution to the business.

One CEO arranged for the team members and their significant other be picked up by limo and treated to dinner at the best restaurant in town. A small token of appreciation was given along with participation of the executive team. It’s been several years, but the team still talks about how they were recognized.

The company had many volunteers to join teams and make a big contribution. It’s best to understand that rewards like this bring loyalty and incentivize team members and other employees to be part of success. It’s a small price to pay for the benefits that are gained by collaboration, communication and success.

How do you reward good team performance?