The current economic climate is placing extreme burdens on all businesses to take strong measures to ensure their survival, as well as to retain or maximize their ability to capitalize on the eventual recovery. AIQ has experience in advising our clients during such contraction crises, such as were experienced in 1987, 2000, and 2008.
Many of our clients are approaching their suppliers seeking temporary reductions in cost to help weather this storm. A typical request is for a 20% cost reduction for 90-120 days. Such an approach, when successful, can have a meaningful impact in conserving cash resources for what is likely the most acute period of the current economic challenges.
Suppliers who earn most of their income from workers on their bench are particularly susceptible to an overture of this kind. Here’s why: if they are deciding whether to RIF valuable information workers due to reduced demand, an arrangement with a short-term rate reduction can help them preserve their own firm’s capability for recovery, at the expense of reduced margins for a set period of time. Therefore such an offer will be palatable to them.
Suppliers where you have a committed take-or-pay contract with significant term remaining are much less likely to change their cost profile, even on a temporary basis. Telecom and colocation providers are two examples where this is likely to be the case.
However, regardless of how your suppliers respond to a temporary reduction request, it will nevertheless have the effect of softening the ground for the next time you go out to market. This is because the request will have demonstrated that there is (was) a real need to cut costs, and they will take you more seriously in subsequent competitive market efforts.
Virtually any supplier who has been through economic times such as these before, and is wise enough to know how to deal with it, should have a plan in place on how to respond to temporary reduction requests such as yours. You should expect that they will use such a request as an opener to initiate negotiations, where they will try to limit their exposure to loss of future business, increase their margins post-reduction, and provide greater line-of-site into future revenues. Should they prevail in such negotiations, it will translate into your company’s loss of future flexibility, and higher prices (relatively). Accordingly, you will need to be very cautious and protect against being exploited.
Typically a supplier will respond to a request for temporary cost reduction with “We’re happy to consider this, let’s discuss it” or “In order to give you a 20% temporary discount, we’ll need to receive some assurances from you so that we can be made whole”. They will then enter into negotiations and attempt to do any of a number of things that will benefit their business at your company’s expense, such as:
- Extend the current contract obligation for a longer period of time
- Increase the committed “take-or-pay” amount, such as with an escalating revenue commitment
- Press for exclusivity terms
- Increase rates after the temporary period to above your current rates
- Set the rate structure in such a way that insulates them from future competition, at above-market rates
There can be other tricks that get introduced as well, which are generally not understood by the buyer if the person is not experienced with these kinds of negotiations and does not possess relevant historical market/contract data.
Your target should be for an unconditional reduction of 20% of the next 90-120 days of expense, with no other changes. You will want to ensure that you receive this in writing, signed by an authorized party who can bind the supplier. You should avoid accepting assurances from an account rep to take care of it, even if the change shows up in your invoicing, because often later on the supplier will come back to collect the difference, citing contractual or tariff reasons why the assurance was invalid.
As the suppliers are likely being inundated with similar requests, you may have difficulty getting their attention. It will be important to have your budget owners continue to reach out to their suppliers, book calls, and actively chase down these concessions. AIQ suggests you first prioritize based on potential impact.
Taking all of the above into consideration, following is a suggested plan of action:
- Send the request letters out to all material suppliers.
- Have your budget owners identify where their biggest spends are, as well as which suppliers they believe are most likely to demonstrate flexibility.
- Have your budget owners request calls (not to negotiate, but to request that they confirm compliance) within 24 hours of sending the letters. This conveys a sense of criticality and that the request will be pursued, and is not just an exercise.
- Meticulously track responses and doggedly follow up with the suppliers, particularly the material ones. No one will think less of your personnel or your enterprise for doing their jobs, and it won’t harm relationships.
- Advise your team that whenever a request to negotiate arises, that you be copied on it, and that they strictly should not negotiate.
- If you receive notices of requests to negotiate, and it is a material supplier, please feel free to contact AIQ for assistance. We will advise you on these situations and will suggest critical actions you should take.
- In some situations, this may be an ideal opportunity to open up negotiations in what is presently a blazingly hot buyers’ market. In those situations, AIQ can help you to recompete these spends to exploit the current market conditions for the benefit of your company.
One other thing to think about – as AIQ has worked with its clients, occasionally current spends were not addressed by AIQ, as the client was planning on a transformation from an “as-is” to a “will-be” state. In economic crisis periods, such transformative projects are sometimes indefinitely placed on hold, leaving the current spend unexamined and not competed. Accordingly, you may have latent savings opportunities that were abandoned or are laying in hibernation that could be resuscitated.
As one example, AIQ once identified a $1M annual run-rate fiber network that had been laying fallow for over a year, that the client had actually forgotten about. It was an easy fix to send in a disconnect notice.
AIQ is happy to informally advise you on this subject. When you have more significant needs, we are here for you on those as well.