So you think that only the biggest companies get the best deals from their transportation and technology providers? Think again. A closer look at major markets reveals that pricing patterns aren't quite so logical or systematic as one might assume. Vendors can be highly erratic in choosing which customers to favor with discounts or better deals. The reason they get away with it: a broad lack of pricing transparency.
In certain categories, "pricing is all over the map," says Jon Winsett, a partner in NPI (www.npifinancial.com), an Atlanta-based consultancy which specializes in spend management. "It's like the Wild West." Two companies of similar size, buying the same product or service, might be paying two completely different prices. It's a little like sitting next to someone on an airplane and discovering that he paid half what you did for his ticket.
As a result, many companies don't know what to ask for when it comes to negotiating price, says John Haber, a partner with NPI. His firm has seen multiple instances of small accounts getting better pricing than their bigger rivals. The discrepancy is especially evident in the small-parcel sector, which is dominated by a handful of big players - essentially, FedEx and UPS. Says Haber: "They keep pricing close to the vest."
Often the difference will be uncovered when one company acquires another, only to learn that the entity being absorbed had a better deal with service providers than its new parent. Or, the truth comes out when a company hires a third-party such as NPI to do a deep analysis of a particular vendor's cost to serve that customer. A company can save up to 20 percent on small-parcel costs by renegotiating contracts based on this newfound knowledge, Haber claims.
Savings are also achievable in truckload and less-than-truckload services, although the greater competitiveness of those sectors means pricing disparities aren't so wide as they are in small parcel. Potential savings there are more in the area of 10 percent, according to Haber.
Most transportation contracts have 30-day "out" clauses, although they are rarely exercised. In theory, of course, a vendor is free to refuse the customer's request for a better rate. But the poor economy has made it extremely difficult to say no. FedEx and UPS, says Haber, "are battling each other right now for volume. Both have got excess capacity." The stabilization of pricing that some thought would follow DHL's recent withdrawal from the North American parcel market never happened.
Often the lower rate is in better keeping with the vendor's actual costs. Take a small store located in a major mall. The small-package carrier is likely delivering packages to multiple businesses in that complex, reducing the true cost of serving any one account.
Watch also for the imposition of surcharges and accessorial fees, which can double a base rate in some modes of transportation. Yet another source of possible savings is in carrier billing errors.
Similar opportunities for savings exist in the technology arena, where NPI tracks the economics and pricing patterns of some 5,000 vendors. About 175 of those account for 90 percent of information-technology spend in North America.
Winsett and Haber urge companies to take another look at their software maintenance agreements. Vendors often try to achieve annual increases of 10 percent, with the base amount locked in as a double-digit percentage of what the customer initially paid for the software. So why not insist at the outset that annual increases be tied to the Consumer Price Index, which averages 3 to 4 percent? "Just that simple act can save you hundreds of thousands of dollars over the life of that software," says Winsett.
Price creep is a danger with hosted software. Big vendors might agree to a one-year subscription agreement, with the understanding that a dissatisfied customer can cancel the deal after that time. But the cost of training new users and integrating with other systems is so high that companies might find it tough to extricate themselves from these supposed "trial" agreements. "If the vendor gets its tentacles around you for that first year, it's extremely difficult to depart after year one," says Winsett. Then it can proceed to charge an "inordinate amount of increase" over subsequent years.
The solution, Winsett says, is to lock up pricing for multiple years without formally committing to a deal over the entire time. In addition, companies should push for reductions in their "enterprise agreements" (EAs) with major software vendors, especially when the purchase of new hardware or software includes the OEM licensing costs that an EA would otherwise provide. "That can amount to a seven-figure savings if they give you credit for it," says Winsett.
NPI further recommends that companies take a close look at any underutilized software licenses. "It's critical to have widespread visibility across your technology infrastructure to see where vendors are charging you unnecessarily," the firm says.
Large or small, a buyer of transportation or technology services must stay vigilant. Effective negotiations, says NPI, "aren't about you or the carrier. [They're] about data and visibility."
- Robert J. Bowman, SupplyChainBrain
Comment on This Article
Timely, incisive articles delivered directly to your inbox.