Relevance

October 24, 2011 Comments Off on Relevance

The recent past has seen new restoration contractor networks formed, new restoration vendor programs deployed, and other restoration vendor programs slip into a lower gear or disappear altogether. The immediate future promises a major vendor review and another new service offering. Of course, evidence of action is not necessarily proof of relevance. The question to always ask is whether change leads to relevant progress or is it merely action without value.

The root issue to examine is the reason for the activity. There are a couple of possible motives:

First, industries that contain very limited competitive differentiation tend to repackage the same old services under the guise of creativity. Thus, every now and then, contractors’ marketing departments or insurers’ supplier management departments find little evidence of value in their current practices and decide to do things over again – making a few tweaks to the old staples of ‘price control’ and ‘customer satisfaction’.

Secondly, there are widely-held beliefs that (a) major networks of restoration contractors offer the best service and price solutions and, (b) the largest insurers make the best partners. Yet it’s crystal clear that the major contractor networks have limited service uniformity and to depend on the largest insurers for consistent, sustained revenue is like sitting down for dinner with a grizzly – you’re likely to be the main course. However, even the repeated failure of this ‘bigger is better’ business model fails to deter the key players.

What has happened to the industry? Trying to create a new cloak from old cloth just does not work. What is missing is the importance of relevance in the strategic process. Let’s take a closer look at two notable examples of where the industry is off-target:

Price

It is pointless to attempt to control the price of a service while ignoring its overall cost. An example of this is insurers demanding rebates and discounts while implementing all sorts of operational rules that add to a contractor’s operational workload – thereby driving up their operating costs. It is short-sighted to brush this off as “the cost of doing business”. It is not.

Simply put, when an insurer cuts prices and drives up a supplier’s operating costs at the same time, they’re creating a financial vacuum that has to be filled one way or another. The choice for the insurer is to drive significantly higher business volumes to the vendor to trigger additional marginal revenue. If this doesn’t happen, the contractor must resort to price creativity and recover costs that way. Obviously, the better approach is to work on marginal revenue but which insurer has bothered to work out marginal costs with a contractor? Significant things happen to a contractor’s business model when a combination of discounts and higher business volumes come into play in the short, medium, and long term. Incurring involuntary profit loss and enduring revenue uncertainty are not costs of doing business.

Insurers’ supply chain departments have failed to properly connect the relevance of price management to cost control. Ignoring the ramifications of tinkering with pricing models is inexcusable on the part of insurers (this is the financial industry, right?). If insurers continue to wonder why they struggle to prove the financial benefits of their vendor programs, they should consider abandoning their price obsession and undertake a study of true costs.

Contractors, too, need to brush up on their communication and financial skills. Their reaction to the various pricing conventions is either automatic acceptance or cynical re-tooling under the cover of complicated estimating programs. In my personal experience (during my vendor program days), only one contractor ever attempted to explain to me how price changes affected their overall costs.

Major Players

Dealing with major contractor networks is always preferable. Not.

It would be the way to go if the major networks consisted of branch offices reporting to a head office. This is rarely the case. Franchises, associations, affiliations, alliances, buying groups, and member networks almost never offer any consistency beyond that provided by a collective logo. The control mechanisms just aren’t there. Also absent is the commitment or the business acumen on the part of members (but not the leaders of these entities) to be prepared to sacrifice for the common good. It’s a dangerous combination.

Networks appear to be created on the notion of what is advantageous to the contractor. However, both the contractor and the end-user (the insurer) quickly see the gaps. The member contractor realises that new business is not pouring in or, if it does for a while, it brings a combination of low-ball prices and high-demand service that produces little net profit; the insurer is left managing relationships direct with the member contractors and not a ‘head office’.

What’s missing is relevance. Restoration contractors sign-up to networks and insurers create vendor program for exactly opposite financial reasons: one party expects profit to flood in; the other expects to hold it back. Neither wins. It’s a marketing shell game. It’s a front-loaded promise with no back-end support. Like all gamblers, insurers and contractors suspect they won’t win in the long term but hope to strike a jackpot at least once. This is not what sustainable business is about.

A vendor network has to be relevant to the customer, not just to its members, if it is to succeed. Of course, one must define ‘success’ first. If success is seen as longevity, a wide membership, relationships with major insurers, and a well-known brand, most of the major players are doing quite well.

If, on the other hand, success means that the entire network offers uniform, measurable service, that the members of the network benefit from bulk purchasing, that revenue streams are predictable and consistent, that the members support each other, and that profit margins are adequate, then we may have a slight problem. In any given network, about 20% of the members are happy with their situation; the other 80% range from mildly cynical to deeply despondent. To put it from the customer’s perspective, 20% are relevant, 80% are not. This is exactly how vendor programs play out. An insurer will ostensibly sign up most members of a network and then feed business to only a few. It happens again and again and, amazingly, the networks put on a surprised face every time. “Why do you pick and choose from our members?” they ask.

The answer again lies in relevance. The few ‘chosen ones’ offer what insurers need. The rest are in it for the ride offered by a well-known logo and by persuasive marketing departments.

There’s a huge gap in this segment of the business and there is enough leadership, experience, and intelligence around to take up the challenge of creating a truly relevant and effective network. My guess is that this will happen sooner than later and others will wonder why they ignored the many lessons learned over such a long time.

Let’s see if the next few months finally bring relevant progress to the industry.

Advertisements

Where Am I?

You are currently viewing the archives for October, 2011 at .