In the vast majority of cases the business owner and staff, when asked, are convinced they are paying a competitive price for their goods or services. On occasions they are less happy with the service they are getting but overall are satisfied that they have been able to negotiate a good deal with suppliers. The more honest are likely to admit, reluctantly when questioned further, that they don’t have the time to look for better deals.
For example one of our clients (a training company), thought their stationery supplier was giving excellent value for money with often two deliveries a day. In fact when we negotiated with the supplier, it became clear that they were responding to inefficiencies within the client’s organisation (hence the two deliveries a day!), but were charging 38% higher than the market rate. Once the business owner was aware of the internal problems, they were easily resolved and the supplier kept the business – at the lower tariff saving £10,000 per year.
Another client (an accountancy practice), had a ‘telecommunications expert’ in their IT department so the MD was sceptical of any possible benefit in this area. In discussions the ‘expert’ assured us they were paying 1 penny per minute for all local and national calls. An analysis of their itemised call charges clearly showed that the real cost was 3 pence per minute. When asked why he thought it was 1p, the ‘expert’ replied that the salesman assured him it would be 1p! They are now with a better (and more reputable) provider – and saving a significant amount of money each year.
So who benefits?
This lack of focus, fragmentation, low level of purchasing expertise and shortage of time is an ideal situation – for sellers! It would be nice (but wrong) to think that the above examples are isolated cases. In fact, the incidences where clients were obtaining anything near acceptable value from their spending are a very significant minority.
The situation facing sellers is therefore a mixture of:
Lack of purchasing experience of the buyer – its mostly not their main job.
Little, if any, expertise in the market of the service or product – so no real idea on the ‘going rate’ or market forces at work.
Lack of time to make a proper comparison with other suppliers.
Lack of knowledge of where to look for good alternative suppliers.
Lack of both time and expertise to properly assess the relevant supplier’s offer and track record.
The decision maker is often not the business owner and it’s not their money – sometimes (as with large national stationery supplier), there are inducements (called ‘free’ gifts) to continue to use that supplier!
This results in the buyer making their decision in the time they have available (often little), and on the information at their disposal (often insufficient and naturally biased). However, given the history, structure and time pressures of most SME organisations the consequence is they end up getting poor value for their spending – because there has been no alternative.
Many SME’s have used cost-reduction companies and advisors, often with mixed results. Costs have been reduced but in our experience either at the expense of customer service or by only enough savings to convince the business owner to switch supplier – or both. In many cases there is pressure to switch suppliers (so the agent gets commission), and often the cost-reduction company will seek up to 50% of the savings.
What’s the alternative?
Well there is one specifically designed for SME’s – it’s the Purchasing Partnership UK.
They provide the purchasing expertise and market knowledge – primarily but not exclusively in the area of indirect costs
Since they never take commissions from suppliers they are able to give clients realistic and unbiased advice.
Existing suppliers can be properly managed to get better value for clients or new ones found – the client decides.
Clients avoid the time and ‘hassle’ in dealing with suppliers – they get written supplier comparisons for them to make easier, faster and better decisions.
Clients save money – the last 8 had a return of 5 times their fee and are always put on to the best available tariff from day one.
Clients not only get better value (a good balance of price and service). They often get assistance to improve their internal processes – so they gain twice.
Costs are not just reduced, but properly managed to ensure that the client’s cost base is kept as low as possible whilst maintaining value.
In fact it’s the Purchasing Manager SME business owners don’t have and are able to provide the co-ordination to purchasing needed in such organisations. The client pays a cost-effective fixed annual fee based on turnover and then keeps all the savings – however large! It’s guaranteed that the client will save at least twice the fixed fee and they can then use the service for any purchasing assistance and advice throughout the year.