Could customers and suppliers redeem us from post-COVID-19’s economic crisis?

This article was published earlier in the Contracting Excellence Journal of the IACCM

As we pass through the high tide of COVID-19 and its threat to public and private sectors, we wonder -- can we handle the post-pandemic’s fallout? And yet, opportunities are knocking at our door! What follows tells what they are and how to reel them in.

The immediate shock of being confronted with the COVID-19 pandemic, plus the world’s governments’ responses to protect the health of their citizens are slowly pulling behind us. But the aftershock of this pandemic has spawned a worldwide economic crisis. A collapsing economy -- more than pandemic itself – is today’s nightmare. Are we ready for this?

Here’s a twist of hope -- would it surprise you if you realized the pandemic is not all bad for our business economy in both public and private sectors?

Some find opportunity

Manufacturing for the health industry, for example, is blooming – maybe booming -- because of the strong demand for health care and preventive supplies (like antiseptics and masks). We all know we can purchase these from home, and at the industry level the need has been rising for ventilators that support Covid-19 patients suffering from severe respiratory problems.

The IT industry has seen opportunities increasing to supply services and products needed to cope with the short-term, health crisis difficulties. These could relate to social isolation, working from home, heightened security risks and so on. Obvious examples are:

• social and video conferencing platforms like LinkedIn and Zoom;

• remote-office hardware such as laptops and webcams;

• Cloud services to share documents and structured data;

• virus scanners; and

• remote access control systems.

Less obvious examples are products and services for at-home medicine, such as home screening for a urinary tract infection (UTI) or a sexually transmitted disease (STD). Both screenings are in high demand today, because seeing a physician is now more difficult than ever. Or think of the need for Covid-19 tracking applications that some believe are solutions for decreasing the need for social isolation.1

Furthermore, companies that must cut costs are using information technology (IT) to contribute to their cost-cutting goals. Some want IT to replace costly internal systems with cheaper and more flexible outside solutions. For example, under pressure of the current crisis, the call center of an international European airline is now transferring all of its help desk services to a near-shore IT service provider.

But, what happens when cost cutting generates supplier problems?

IT suppliers that can fulfill these demands and save their customers money are to be congratulated. Sadly, some IT customers ask their suppliers to cut down spending on business operations or postpone payment for services.

Some suppliers might respond with a reactive attitude by adhering inflexibly to contractual obligations and refusing to help their customers out, fearing it might have a negative impact on their own short-term ambitions and goals. The same is true for some customers who unilaterally put the financial burden of the crisis on their suppliers. Both responses monopolize on hidden opportunities to take advantage of parties in distress.

Choose dialogue, not disputes

Customers demanding financial support, typically by asking for discounts or otherwise reducing the monetary value of contracts, are overlooking better options than to defend their own turf. Being uncompromisingly defensive typically generates conflict with the customer or supplier relationship and this can result in a negative spiral.

Costly disputes lie at the bottom of that spiral, and too often parties see each other in court. -- often ending the relationship -- not to mention loss of mutual business, unproductive hassles and many invoices for legal fees. Instead of doing that, customers and suppliers need to respond to such financial pressures by strategically and constructively collaborating together.

Find opportunities through dialogue for both supplier and customer

First, if the supplier can afford to postpone collecting revenue, he or she could suggest shrinking the current contract in exchange for business later on. The supplier could also consider any of the following:

• Why not consider a lower price for any service that does not need loads of human labor?

• Why not postpone or reduce payments for licenses or other intellectual property (IP)?

• Alternatively, consider shifting a short-time investment-based development project into a longer-term subscription or Software-as-a-Service (SaaS)-based deal, thus preserving cash in the short term for the customer and safeguarding long term business for the supplier.

• Consider transferring some supplier and customer staff to work on joint research and product development. The benefits would later be shared between customer and supplier, possibly as a joint venture.

Second, both the supplier and customer might find ways to eliminate any risks that are priced into the deal which could be taken out. For example, if a project has been sold with a contingency of 10 percent priced in, and the project has now advanced and has moved beyond dealing with a few risky hurdles, why not reduce the contingency margin to below 10 percent? If, for example, a plastic manufacturing contract is based on a $80 per barrel price for crude oil, with an upward risk of 20% (now that barrel prices are around $30) it would make sense to remove some of that risk.

Looking for risks to deduct from the cost of a service would of course apply to both the customer and supplier. Generally reviewing and re-allocating risks may be a good way to fit the original agreement into the new circumstances.

You may find yet another opportunity by expanding the business between a particular customer and its supplier into services or products that bring more value to the table. For example, why not find ways for the buyer or customer to broaden the engagements, or add more volume? Of course, such a strategy would require the supplier to consolidate sales volume rather than raise prices.

Another way to expand the business and add more value might be to provide deeper, more complex services or products. For example, a telecom operator delivering basic connectivity -- like telephony or internet -- might want to expand into security services or bespoke social platforms. A supplier doing more business may do that at a lower overhead and share the advantage with his customer by assuming a lower profit margin.

Obviously, additional services or products represent extra measurable value for the customer. Part of that may feed back to the supplier as a decent revenue and profit margin and return more benefits for the supplier too, like new business opportunities.

But can we really do all this?

“This sounds all fine”, suppliers may say, “but is this feasible?” After all, the alternative way requires close collaboration, and truthfully, suppliers and customers are quite used to working together in a kind of competitive, potentially love/hate relationship.

So, how would they change the direction of that downward relationship spiral, and create a good collaborative relationships? The shortest possible answer is to reorganize priorities as “them – us – me” -- in that order.

As an example, when the Dutch National Ballet2 hired a Parisian software developer to build a system to manage their 3,000-plus costume collection, budgets were tight, of course. But did they demand a reduced price, or postpone the project altogether? Not to my knowledge. Instead of putting price pressure on the supplier, the National Ballet thought of the interests of the developer, who needed to make a decent revenue and margin.

Aside from that, they were always looking for further business. So, the National Ballet first located a co-funder in the Dutch National Opera who eased the budget. Then the company discovered a real need with other theater companies around Europe. The National Ballet joined forces with the developer and together they sold the system to other theaters including Covent Garden in London and the Parisian Opera.

Collaborative relationships are all about understanding and respecting the challenges and interests of the other party. And then taking action to define, design and implement the type of collaboration fit for purpose for both parties. And this topic has wind of its own -- enough for a follow-up article!

END NOTE

1. How Technology, Medicine And At-Home Devices Can Improve Healthcare Access And Cost, Robbie Cape, Forbes Technology Council, Feb 14, 2020

2. Reference Dutch National Opera and Ballet or Dutch National Opera