In order to grow a customer’s business, you must get inside it. Unless you know it, you cannot grow it. No business can be grown from the outside. By being an insider, you can be in business together with your customer instead of just doing business as an outside supplier. The opportunities to be in business together are found in the customer operations, where you can affect outcomes and where growth can take place if you are able to improve them.
Contributing to customer results shows up in one survey after another as one of the top three critical success factors in customer satisfaction. Few customers say that they need better products. Many products exceed customer needs, such as Digital Equipment’s "fastest-on-earth" Alpha microprocessor, whose price had to be cut back periodically to compete with the lower-priced, slower systems of Hewlett-Packard and Sun, whose performance was "good enough." What comes across is that customers need supplier performance—not product performance—in three categories: more knowledge of customer operations, more understanding of customer competitive situations and more strategic ways to deal with them, and more proactive contributions to customer profit improvement that are made without having to be asked for.
Customers are the genesis of your business. For this reason, you must both be in the same business. This means that the customer must come first, by making customer profitability your combined prime objective and managing your business as being of your customers, by your customers, and for your customers.
Every business has natural partners. Who are yours? They are other businesses whose growth is dependent on you. Selecting your growth partners is the single most important act of Consultative Selling.
Good partners meet five criteria:
- They want to grow.
- They want you to grow them.
- The growth they want from you is within your norms.
- They can grow you in return.
- Their growth by you will convert additional good partners.
If you know who your natural partners are and what they need from you in order to grow, you can dedicate your Profit Improvement Proposals to them from the outset. Your business positioning can be a natural response to theirs. Also, your system capabilities can be exactly receptive to their needs. Furthermore, your database can contain knowledge of their growth problems and opportunities. Your entire business can be the reciprocal of the businesses of your partners.
You have two types of natural growth partners. One is composed of businesses that are currently growing because of you. The other is composed of businesses that you could grow but are not currently growing.
Choosing Partnerable Customers
There are four questions to answer about your current customers in order to determine which of them you should partner with.
- Whom are you growing right now? Some of your growth partners are customers you are already growing. You may not be aware of your contribution to their growth. You may think you are merely selling to them. But they are actually partners without portfolio. In order to determine whether any one of them should be selected as your partner, you have to answer three more questions.
- How much more can you grow them? Growth takes place in the future. What is the most likely projected rate of improved profits you can plan for in the growth of their business over the next three years? If the projected rate of growth is static or in decline, you may not have a true growth partner. Instead, you may have a mature customer to whom you can continue to vend products at competitive prices, whom you should sell to and profit from but not partner.
- How much are they growing you? You may be unable to know the full extent to which you are bringing growth to a current customer. But you can much more easily calculate the profits by which you are growing as a result of the customer’s business with you. There are four standards by which you should measure profits: their absolute value, their comparative value ranked against your customer list as a whole, their rate of growth, and the trend of their growth rate over the past three years.
- How much more can they grow you? Because growth partnerships must be reciprocal, you must evaluate the most likely projected rate of your own profit growth over the next three years to see whether it is increasing, becoming static, or entering decline. If the projected incremental rates of growth are increasing for both your customer’s and your own business, you have the ideal basis for growth partnering.
There are three questions to answer about prospective partners in order to determine which of them you should partner with:
- Whom else can you grow? Growable businesses that you are not currently growing are your source of consultative expansion. In order to qualify as a growable customer, a business must meet two criteria. Its business function problems must be susceptible to significant cost reduction by the application of your expertise. In addition, your expertise must be able to increase the customer’s own profitable sales opportunities.
- How can you grow them? For each growable customer that you determine is potentially partnerable, you must plan a growth strategy. The strategy will set forth the precise means by which you will add new profits to the customer’s business. You will need to specify how much profit will accrue from reducing business function costs, how soon its flow will begin, and how long it will continue. You will also have to specify the amount and flow of profit from new sales opportunities that you can make available and the markets they can be expected to come from.
- How much will they grow you? A business that you can grow must be able to grow you in return if it is to be partnerable. Its contribution to your profit volume and its projected three-year rate of growth must meet or exceed your company’s minimum growth requirements.
When it comes to gainsharing, not all partnerships are created equally conducive. Gainsharing represents the essence of partnering, where rewards are shared in proportion to risk and contribution. Relationships that, for one reason or another, stop short of profit sharing are stopping short of full partnering.
"Full Monty" partnerships of total comity meet selective criteria. These criteria allow partnerships to be assessed with a good deal of predictability. Some criteria are personal to the customer partners: Are they natural sharers by personality or self-aggrandizing nongivers? Are they predisposed to think in terms of benefits or their costs? Are they dealmakers or traditionalists about price being the sole basis for transactions?
"Know your customer" means to know these things. Over and above them are situational factors that may modify or nullify personal criteria. They include:
- A business that wants or needs to be first to apply a new technology, either because it is a leader and wants to stay that way or because it must get closer to the leader.
- A business that is cash poor and cannot pay for the benefits it needs.
- A young business that must conserve cash for growth but needs every accelerant to growth that it can get its hands on.
- A business whose industry is in an economic downturn and can use gainsharing as a form of barter to trade present uplift for a future payment.
- A business in a highly competitive industry that cannot risk a negative impact on its stock price from a major cash outlay on its balance sheet.
For businesses in any of these situations, selectively used gainsharing can be an incremental growth strategy. Depending on a customer’s position in its industry, its market, or its life cycle, partnerability may be more dependent on the speed with which gain can be created than by its total amount. Fast gain can make fast partners. It can also predispose negotiations to yield a favorable share for the consultative seller.
Cycling Continuous Improvement
How can you tell if customer managers are partners? If they give you leads by telling you where they hurt or what unrealized opportunities they fantasize about, they are partners. If they keep asking you, what next? or, what else can you do for us? or, where do we go from here? after each successful PIP project, they are partners. If they sell for you by going upstairs to get funds for your PIPs, they are partners.
A continuous improvement cycle is composed of consecutive PIPs. Each successive PIP is initiated while the preceding PIP is no more than halfway into its projected life. As soon as PIP #1 produces profits, a share of its gains can be allocated to fund a part or all of the investment required by PIP #2, and so on.
As PIP self-funding proceeds, a "partners’ pool of funds" is created for you to draw on. This is the ultimate outcome of your partnering—a partnership that capitalizes itself to achieve financial autonomy, free from the need for third-party sponsorship of its investments in continuous profit improvement.
A business partnership is legitimized only when a partners’ pool of funds is created. Up to that point, it is merely a relationship. Once a pool of funds is capitalized by the partners, they can dip into it at their discretion as if they were a miniature business. The customer manager ceases to be a customer and becomes a client. The consultative seller ceases to be a seller and becomes a comanager.
Partnering requires two choices. One is your selection of the customers you will grow. The second is made by your customers: Why should they partner with you? There are three reasons:
You are an important source of their growth profits. The contribution of new profits that you can make to customers must be significant. Only then will your partnership be important enough to both of you to merit top-of-the-mind attention, both theirs and yours.
To be an important source of growth for customers means that you must account for worthwhile incremental profits. You must also be able to deliver them in a timely fashion, recognizing the time value that money has for them. In this, you must be dependable. They must be able to count on you to improve their profits when you say you will and by the amounts you promise. Your importance to them will be in direct proportion to your reliability.
You are one of their best investments in continuous profit growth. When partners do business with you, they must perceive the price they pay to be an investment rather than a cost. The distinction is vital, because only an investment yields a return. They must understand that they are not investing in your products or services or systems, not even in your solutions. They will be investing in new profits. The return they receive from their investment with you must be among the best yields they can make.
Just how high do customers’ returns on investing with you have to be? You must compare yourself with their options. Normally customers will invest in their own business in order to make profits. They have a "hurdle rate" that sets their minimum return. As their partner, you must offer them a better choice. You must make it more profitable for them to invest in your business. Either the investment they are required to make will be smaller yet yield a similar or faster return, or the return they receive from you will be larger, even though the investment may also be correspondingly larger.
You both have the same competitors. When you sell products or services, positioning yourself as one of a customer’s several alternate vendors, you are concerned only with defeating your own competitors—rival vendors. To be a business partner means that you must concentrate on defeating your customer’s competitors. Unless you have the same objective, you cannot be partners.
Customers’ competitors are the constraints on their growth. They have two of them. One is their current costs, against which they compete every day and which they must reduce if they are to improve their profits. You must help them. Their second source of competition is in the area of sales opportunities. They compete for them every day too, trying to win customers against their competition. If they are going to improve their profits, they must increase their profitable market penetration. You must help them.
As your partners, your customers grow you if you can make three transformations in your relationships with them.
You must first transform yourself from a supplier of products and services to a supplier of profits. You must change from a manufacturing or service business into a supplier whose product is profits.
You must transform yourself from representing an added cost to representing continuous added value. You must change your basis for doing business from selling performance values at a price to returning dollar values on an investment. Otherwise, you may never have the chance to partner.
Pressurizing the Partnering Prerogative
Ever since product and service commoditization became legislated by customer insistence on open standards, supplier control has been inevitable as a logical extension of customer dominion over supply chain management. The PICOS program of General Motors shows how product-based vendors are being pressured to relinquish their partnering prerogative.
PICOA stands for GM’s Program for the Improvement and Cost Optimization of Suppliers, a politically correct manner of describing the continuing thrust to reduce the costs of all the parts that go into each GM car.
Overall Strategy
- Get immediate price reductions.
- Secure longer-term price reductions from all suppliers
- Sort out the first and second tier suppliers.
- Only single source with significant price reductions (18 to 40 percent) that are firmly baked into fixed-price, long-term contracts.
Tactical Overview
- Establish well-qualified, well-trained, and articulate purchasing clones in all business units to implement these practices.
- Plan extensive supplier price reductions for each car model.
- Send out inquiries around the world in search of the lowest unit price.
- Establish short- and long-term price reduction targets and go very low.
- Know your potential winning suppliers and their competitors inside and out before you begin to negotiate and play first and second tier suppliers against each other.
The Underlying Themes
- Identify and parade the enemy as Japanese companies, not GM.
- Understand the balance of power between each supplier and GM.
- Keep taking the temperature with vendor ratings and supplier council meetings.
- Offer exaggerated growth and future order quantities as bonuses.
- Start working with the likely winning suppliers as early as possible on price reductions that are termed "cost reductions improvements."
Before Awarding the Deals
- Establish long-term contracts as the ultimate goal.
- Establish the long-term contract rules.
- Establish that nonprice factors like tooling costs and R&D are not allowed.
- Resist all suggestions that some supplier costs are not controllable (i.e., raw materials).
- Focus all activity on dramatically and immediately reducing the unit price.
The Agreements
- Tie up the short-term unit price.
- Keep nibbling away at the price and terms even at the midnight hour.
- Always appear to be in a desperate hurry, but in reality take as much time as needed.
- Pull the long-term deal out of the cupboard.
- Intensely squeeze some more out.
- Get the supplier to sign.
Managing the Chosen Suppliers
- Introduce the suppliers to our corporate commodity councils and our advanced purchasing product development teams.
- Totally involve each supplier’s top and upper management—get commitments that the supplier’s middle management would never make.
- Request that each supplier provide you with detailed information on the cost-profit structure of the products it currently or proposes to sell us.
- Don’t accept raw material indexes as cost information when a supplier proposes a price increase; get the cost-profit information.
- Establish a friend-buddy relationship with middle and lower-level supplier people to pass cost-profit and competitive information to us.
- Be prepared indirectly and under pressure to bluff.
- Destabilize each supplier’s people with many urgent meetings and many demands for information.
- Set new deadlines for suppliers to meet but defer decisions to increase their anxiety.
PICOS programs are becoming epidemic. As they proliferate, their impact is becoming predictable. A supplier’s margins go first, followed by investment in R&D, plant and equipment, and in the sales force. Noncore assets are cut back and outsourced and the number and quality of supplies that go into a product are cut down.
Satisfying Risk Aversion
Risk tolerance is a highly personalized trait. The commitment of customer managers to invest in a PIP is always a trade-off between their perception of risk and the PIP’s potential profits. No matter how many dollars of profits you propose, managers will adjust them downward for risk. This reflects the managers’ subjective sense of the unlikelihood of their realization: in other words, their estimate of uncertainty about the future.
All PIPs deal in futures. The faster the future payoff, the more certain the PIP. As the time frame to payback and payout lengthens, customer managers have a more difficult task in forecasting the probability of PIP success. The same characteristics that make the PIP so successful can also make its customers’ evaluations more intense:
- Each PIP focuses on a single best solution, ruling out contingencies.
- Each PIP focuses on a single factor that is critical to the success of a customer operation or sales to a market segment, eliminating options.
The space between a PIP’s proposal of realizable future profits and the costs of uncertainty is known as its "trade space." It is the space within which customers contain their indecision, their yes-no trading area where they go back and forth in their decision-making process. Invest in these prospective profits or not? Invest this much, more, or less? Invest now or accept this much opportunity cost? Live with this much technological uncertainty or this much market volatility?
After adjusting a PIP’s profits for risk as customer managers perceive it, they place a personalized dollar value on the PIP’s stream of cash flows. From this moment on, the PIP’s value is contingent on the managers’ sense of how much any uncertainty may cost. The resolution of this calculation will become the PIP’s negotiable net worth.
Since minimizing risk automatically inflates a PIP’s perceived value, you should ask yourself how much you are willing to invest to reduce risk: that is, to shrink the customer’s trade space so you can get to close fast. Three investment opportunities are available to you:
- Guarantee the PIP’s payout. This means that you pay any default between your proposed value and the customer’s realized value so that the customer is made whole.
- Insure the PIP’s payout. This means that a third-party insurer pays any default to the customer, but you pay premiums to the insurer.
- Gainshare in the PIP’s payout. This means that you share in some or all of the customer’s risk by depending for your own compensation on the reward. You can claim a larger share of the gain if you are willing to put up some or all of the up-front costs.
Even without accepting the added burden of taking on the risk of partnering with a supplier, customers are already inundated with risk factors in their own businesses. They include the unpredictability of their operating results, the uncertainty associated with the introduction of new products, the exposure they feel from their dependence on a small number of currently successful products and markets, the potential failure to manage their growth and avoid compliance liabilities or a loss of proprietary rights, and the chance that they may be unable to raise capital if they need it. The following statements of risk by a semiconductor equipment manufacturer are typical of the dangers that all customers deal with even before a supplier knocks on their doors.
Our Quarterly Revenues and Operating Results are Unpredictable
Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. These factors include:
- Economic conditions in the semiconductor industry generally, and the equipment industry specifically
- Customer capacity requirements
- The size and timing of orders from customers
- Customer cancellations or delays in our shipments
- Our ability in a timely manner to develop, introduce, and market new, enhanced, and competitive products
- Legal or technical challenges to our products and technology
- Changes in average selling prices and product mix
- Exchange rate fluctuations
We base our expense levels in part on our expectations of future revenues. If revenue levels in a particular quarter do not meet our expectations, our operating results are adversely affected.
Further, because of our continuing consolidation of manufacturing operations, natural, physical, logistical or other events or disruptions could adversely impact our financial performance.
We Are Dependent Upon a Limited Number of Key Suppliers.
We obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Each of our key suppliers has a one-year blanket purchase contract under which we may issue purchase orders. We may renew these contracts periodically. Each of these suppliers sold us products during at least the last four years, and we expect that we will continue to renew these contracts in the future or that we will otherwise replace them with competent alternative source suppliers. We believe that we could obtain alternative sources to supply these products. Nevertheless, a prolonged inability to obtain certain components could adversely affect our operating results and result in damage to our customer relationships.
We Depend on New Products and Processes for Our Success. For This Reason, We Are Subject to Risks Associated with Rapid Technological Change.
Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to maintain technological parity with deep submicron process technology. We believe that our future success depends in part upon our ability to develop, manufacture and introduce successfully new products and product lines with improved capabilities, and to continue to enhance our existing products. Due to the risks inherent in transitioning to new products, we must forecast accurately demand for new products while managing the transition from older products. If new products have reliability or quality problems, reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products and additional service and warranty expenses may result. In the past, product introductions caused some delays and reliability and quality problems. We may be unable to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace, which would materially and adversely affect our results from operations.
We Are Subject to Risks Relating to Product Concentration and Lack of Product Revenue Diversification.
We derive a substantial percentage of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of our primary products is, therefore, critical to our future success. Our business, operating results, financial condition and cash flows could therefore be adversely affected by:
- A decline in demand for our products
- A failure to achieve continued market acceptance of our products
- An improved version of products being offered by a competitor in the market we participate in
- Technological change which we are unable to match in our products
- A failure to release new enhanced versions of our products on a timely basis
Our Ability to Manage Potential Growth, Integration of Potential Acquisitions, and Potential Disposition of Product Lines and Technologies Creates Risks for Us.
Our management may face significant challenges in improving financial and business controls, management processes, information systems and procedures on a timely basis, and expanding, training and managing our work force if we experience additional growth. There can be no assurance that we will be able to perform such actions successfully. In the future, we may make additional acquisitions of complementary companies, products or technologies, or we may reduce or dispose of certain product lines or technologies, which no longer complement our long-term strategy. Managing an acquired business or disposing of product technologies entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management’s attention to other business concerns, amortization of acquired intangible assets and potential loss of key employees or customers of acquired or disposed operations. There can be no assurance that we will be able to achieve and manage effectively any such growth, integration of potential acquisitions or disposition of product lines or technologies, or that our management, personnel or systems will be adequate to support continued operations. Any such inabilities or inadequacies would have a material and adverse effect on our business, operating results, financial condition and cash flows.
Intellectual Property and Other Claims Against Us Can be Costly and Could Result in the Loss of Significant Rights That Are Necessary to Our Continued Business and Profitability.
Other parties may assert infringement, unfair competition or other claims against us. Additionally, from time to time, other parties send us notices alleging that our products infringe their patent or other intellectual property rights. In such cases, it is our policy either to defend the claims or to negotiate licenses on commercially reasonable terms. However, we may be unable in the future to negotiate necessary licenses on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially adversely affect our business and financial results.
We May Fail to Protect Our Proprietary Technology Rights, Which Would Affect Our Business.
Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secret protection, we believe that our success depends on increasing our technological expertise, continuing our development of new systems, increasing market penetration and growth of our installed base, and providing comprehensive support and service to our customers. However, we may be unable to protect our technology in all instances, or our competitors may develop similar or more competitive technology independently. Other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us or these governments may fail to issue pending applications. In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than we expect or in fact provide no competitive advantages.