When Business Partners ask for a Handout

June 22, 2009 Comments Off on When Business Partners ask for a Handout

What do you do when your major business partner asks you to reduce your profits because they’re not doing too well?

At first, you may find it difficult to believe them, especially if they’re about 100 times your size. However, if they’re showing signs of financial trauma – typically, this includes jettisoning employees in droves and showing up in merger & acquisition rumours – you have to accept their word that things aren’t going too well.

The next thought that may occur to you is why someone else’s poor management should have to cost you, especially if you’re intelligent enough to do well in a depressed market. After all, being a perceptive business owner shouldn’t carry a penalty.

Thoughts may then turn to bleaker outcomes such as what happens if the business partner ends up failing or decides to turn permanently to cheaper partners.

Ultimately, it’s your decision to assist or walk away. No points for guessing what 99.9% of business owners do. It’s better to have 95% of what you had than zero. In addition, if you don’t have shareholders to answer to, it’s an easy decision.

There’s nothing wrong in asking for help during tough times, especially when there’s a long-standing and mutually beneficial partnership involved. In fact, the partnership is likely to come out of the hard times stronger than before. The trouble is not in the act of asking but in the manner of asking. In fact, ‘asking’ for help doesn’t really come into play in most cases that are currently under discussion. Most contractors are summoned to a meeting, are given a set of demands, and sent off with a flea in their ear wondering what hit them. They go back to their office and grab their vendor contracts and realise there’s nothing there to protect them. They start talking to others in the same predicament and the resentment grows. Not because they have to give up 5% or 10% of earnings in the short-term but because they had been lulled into thinking that all major decisions would be discussed and agreed before being implemented. Surprise! Who thought the restoration industry would fall victim to a variant of the Bush Doctrine? Yet here we are, pre-empted, battered, and confused.

However, this is a pragmatic industry. So, the spirit of collaboration defers to expediency and one party ‘saves’ a few million dollars at the expense of their supply chain. Soon, however, there’s another surprise! The supply chain sees no decline in profits during the period of belt-tightening. How can this be? Well, it’s a pragmatic industry. Don’t expect people to give up bonuses too readily, especially in times when personal fortunes have shrivelled. Those line items in estimates have started to bloat in all sorts of funny ways.

Anyone will tell you that it’s utter folly to show up for a gunfight armed with a knife (unless you’re Britt of The Magnificent Seven). Yet that’s exactly what insurers choose to do when it comes to keeping estimates lean and clean. Face it, 95% of adjusters can’t stand up to a determined restoration contractor. Part of it is because of an imbalance in experience and knowledge and part of it is due to numbers. The contractor is motivated to make every dollar stick because their earnings are directly related to the overall job cost. The adjuster is motivated to keep their file-load under control – too many pending claims draw unwelcome attention – and gets not a dollar in bonus no matter what the outcome.

Now layer a coat of superciliousness on this situation, step back, and see what happens. Insurers will do themselves grievous injury slapping their backs in self-congratulatory pride over extracting a few dollars from a recalcitrant supply chain; contractors will hang their heads in apparent defeat and hand over their lunch money and not a cent will come off those estimates.

One painful lurch forward, engage reverse and hit the zoom pedal: Vendor relations as done by insurance companies. No wonder everyone wants to be a restoration contractor but no one wants to deal with insurers.


Preferred Supplier Programs

June 4, 2009 Comments Off on Preferred Supplier Programs

Everybody wants to pay less for goods and services but nobody wants a corresponding reduction in value. Imagine what would happen if negotiating a series of price reductions on a vehicle with a car dealer meant progressively losing the wheels, windshield, fenders, seats, heating system, and so on. Few buyers would negotiate because they would immediately see an erosion of tangible value.

It’s different with services. The value embedded in services is often less visible, less dissectible and, therefore, more eagerly negotiated. Some services deliver a physical product. Restoration work is an example. Contractors offer a service but provide a tangible product.

The old approach
Restoration contractors have always relied on enthusiastic marketing to connect with their chosen customers. However, the efficacy of their marketing strategies is questionable considering the peculiar position contractors have placed themselves in – insurers constantly negotiate the price of the service but never the value of the product. Thus, the contractor’s labour rates, job cycle times, profit, and overhead are all open to parley. On the other hand, value content such as delivering high customer satisfaction, exceeding agreed service standards, and providing free risk improvement advice are part of the standard service offer. Whittling costs is now standard operating procedure but withholding corresponding value is unthinkable. The profound folly of this arrangement is rarely questioned and then only in muttered asides. The ubiquitous “doughnut=job” equation (a crude sales technique at best, an acute contempt for insurers’ integrity at worst) has backfired. Contractors have themselves to blame. You just cannot profit from a relationship that relies on mutual back scratching because this is a very limited tactical approach. Eventually it will fail to satisfy one of the participants.

It takes robust strategies to modify the status quo when you have allowed crass commercialism instead of collaborative partnering to steer a relationship for a long time. Most contractors don’t have the time, resources, or appetite to take corrective action. Insurers, of course, won’t solve the problem unless they see some benefit for themselves. Or will they? It depends on the category of insurance company you’re dealing with. More on this later.

Historically, insurance companies’ core competencies didn’t include managing a contractor network. Contractors saw the policyholder as their customer and were left by insurers to handle these in their own way. Local relationships thrived. Everything operated at the tactical level with a heavy measure of differentiation in the delivery of service.

Time for a change
Over time, however, this practice began to be abused. The construction boom of the last decade resulted in new, unskilled, opportunistic entrants to the restoration market. Weather conditions produced new records in claims frequency every few years. Job quality started to become secondary to speed of work. Insurers started to notice a lack of a commitment to service. Rising claims costs added to their concerns. Insurers started to look around for solutions. The auto repair industry offered a convenient guide. There, centralised buying power drove the relationship and repair shops had started to view insurance companies as their customers. Two major components of the relationship were a continuous stream of work to the body shops and regular payment on time, every time.

It seemed an easy template to apply to restoration contractors. So far, however, it has been an arduous undertaking. Most insurers just haven’t invested enough in transforming their operating models or in acquiring professional resources to create and manage sustainable preferred supplier programs. The two major requirements of professionally run supplier programs – maintaining consistent streams of work and paying on time have proved to be notably difficult to implement effectively. Equally, most contractors have elected to bury their head in the sand and refuse to accept the inevitable: the glory days are over. The result so far is sporadically effective supplier programs across the country and many frustrated contractors hankering for the good old days.

Two types of insurance companies
There are two varieties of insurance companies when it comes to effective partnerships with suppliers. First, there are the traditional insurers who still pursue reduced prices as the best way to control costs. They have extensive regional vendor lists and their adjusters have close relationships with contractors. They operate on a ‘win:lose’ basis when it comes to job costing. Then there are the progressive insurers who choose the far more effective way of simply reducing the supply base in return for collaborative efficiencies that produce real financial (and intangible) benefits for all. Unfortunately, contractors don’t really understand the value-based needs of the latter and continue to operate as if price is all that matters, i.e., playing the win:lose game. They’re missing an opportunity to drive change.

The basic ingredients to create partnerships
As stated above, many insurers haven’t yet acquired strong supplier management skills. However, just a few basic ingredients make a good preferred supplier program
1. An open relationship with the supplier
2. Good communication, especially on job progress
3. Comprehensive baseline metrics
4. Collaborative measures to achieve and measure these metrics
5. Active management of these metrics and related service level agreements
6. A strong understanding of the restoration business’ drivers

Any supplier able to offer the above immediately distinguishes themselves as professional partners. The knowledgeable contractor knows this and cultivates their relationships with insurance companies along these lines. The goals are always

1. to make it easy for the insurer’s employees to work with pre-qualified suppliers
2. to make it possible for the supplier to reduce costs and improve service at the same time.

You can start building effective relationships by thinking about the steps below (the first three are vital):

  1. The most important step that few really think about: Cover the high-level stuff (the strategy) thoroughly. The details (the tactics) will fall into place later
  2. Be selective in defining strategy, not exhaustive. It’s better to collaborate on a few outstanding objectives than on a mass of mediocre things. The prime reason why partnerships fail is because the core strategies are overwhelmed by a morass of undeveloped intentions
  3. Focus on results, not actions. For example, don’t attempt to agree on a step-by-step service procedure; instead, agree that service will meet an agreed standard. Many partnerships stumble because they rely only on achieving tasks, not results
  4. Spell out your own purpose in forming a partnership. Say what you’re trying to achieve up front. It’s too late later and, in any case, this is a good way to ensure you think through everything at the outset
  5. Pinpoint the stakeholders who can help or hinder the relationship and deal with them first
  6. Encourage ideas from all stakeholders. Participation leads to commitment
  7. Consult within your own organisation before approaching or agreeing to work with potential partners. You may be the boss but you will learn something new if you do this. If you’re not numero uno, this advice may save your job!
  8. Make initial informal contact with possible partners to find out what drives them, their attitudes, and what their major interests are
  9. Expect the partnership to develop over time before you can formalise it. This can take a long time but shouldn’t if you work diligently at it
  10. Be candid and honest.

All this is easy enough to say but difficult to implement. Anyone who has created a successful supplier: buyer partnership will tell you that it requires some resolute evaluation and comprehensive planning. The biggest barrier usually is admitting that something needs fixing. That’s because dysfunctional relationships don’t require a lot of maintenance once they’re allowed to go out of whack. Just the occasional whining keeps them going indefinitely. An effective relationship, on the other hand, takes a real effort to establish and maintain. Liken it to a treadmill: It goes round forever, it can exhaust you if you try to sprint all the time, you’ll fall off if you lose your concentration or falter, you can injure yourself if you overdo it, and it’s a wasted expense if you don’t apply it. Your best results are achieved by working with a trainer and working to a plan.

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