For our July Webinar, Todd Snelgrove shared strategies that helped viewers rethink how to price, present, and negotiate based on your value of their Services. To conclude the webinar, he answered some questions from the audience. Here are his live answers:
What are the system and process requirements for an organization beginning outcome or performance-based contracts?
I think you need to be able to define what your value is, because you have to know what you’re going to measure for your customer. What do we do for our customers? How do we measure that in our tool? Also, you need to know which numbers you want to use in your tool. So when we go to a customer, you say “we think in the food industry in America, average energy usage is x, or downtime is y.” Have an appendix of numbers, because customers are much more likely to say “I don’t like that number, let’s change it,” but don’t go to them and ask numbers on a hundred things, because they won’t give them to you.
Some other questions: How will you measure that value? What numbers will you use in it? What happens if we don’t hit it? What happens if we do hit it? Do we get price increases if we exceed it? Do we get more share if we exceed it? If we don’t what’s the penalty clause? How do we make sure we are getting access to the opportunities every quarter when we meet? What’s the sign-off process with the customer, to acknowledge that they receive that projected or actual value?
One company I worked with told their internal people that if they sign any value statements that they delivered value that they’ll take it out of their budget. Of course, the maintenance person doesn’t want that to happen, so making sure that there are no unintended consequences is key. The ones I’ve been involved in have gotten down to four pages, all with the lawyers signing off, but it’s about the intent, strategy, and following the KPIs around value, and what happens when we exceed or don’t hit it.
How do you get organizations comfortable with outcome based contracts, if they are subject to the risk of performance by buyers?
It’s funny. Buyers are very risk averse. That’s why they will revert to lower price, because they believe there is less risk there. I think what’s interesting is that the least amount of risk is performance based. So if you’re buying a lower-priced product or service, you’re hoping it works (and every buyer has been in a situation where it hasn’t worked). If you tell them that you’re going to align your business with how we get paid, there’s no risk. You’re getting an output. You’re not buying a number of hours or services and hoping you get value; you’re getting the actual output you want. The machines last longer, the average temperature is lower, the energy consumption is lower – whatever it is. You’re actually reducing risk.
It’s also now best practice. Governments are handing out mandates saying that they need to buy based on best value. So it’s not as risky. Finally, you don’t need to go from a traditional approach to a 100% performance based approach right away. I’ve had more successful agreements by including a collar. We agree that we will provide x amount of value or there will be a penalty. That way, both the supplier and the buyer both have skin in the game.