How much should I spend on that winning that tender?

How much should I spend on that winning that tender?

Oct 2, 2018 | Customers, Governance, Strategy

 

That is a common question, which requires some rephrasing to be answered with anything other than ‘It depends’

‘How much should I invest to increase my chances of winning that tender’ is a better question.

Would you spend 20k to have a 50/50 chance of a $5 million contract?

How about if your chances of success were only 20%. Would you still spend the 20k?

There is a continuum here, one that should change with your circumstances, and your judgement of your chances in the tender process. The management challenge is quantifying the level of risk tolerance that exists at that time.

‘How much should I spend’ is a form of question that implies a short term is involved, ‘How much should I invest’ implies a longer term. It may only be a semantic difference, but  there is a great difference in the manner in which you approach the tenders preparation.

Quoting on tenders has two elements, the first is that now it is a tender, the implication is always that you are just one of several to tender, so it is an auction, of sorts.

The second is that there is never a sure fire thing, even when you have the inside running for any one of a large number of reasons, the most usual being incumbency of some sort. The fact that there has been a tender made public is an indication that the tenderer is not only looking for a price, they are looking for ideas.

To some questions you should be asking yourself:

  • How valuable is the tender to me? If the tenderer is your biggest customer, and you are an incumbent for this sort of job, the answer would probably be very valuable, not just for the job being tendered, but for the ongoing relationship and flow of further work.
  • What is the strategic value of the customer? This will often be a similar answer to the previous question, but your largest customers always started as a new, much smaller customer, and grew, so considering how ‘strategic’ they may be is important. An acquaintance of mine has what he calls a ‘green-keeping’ business that specialises in public spaces. He will do everything possible to win tenders put out by public bodies, councils, schools, and the like, as each one he wins is strategically important not just to the current cash flow, but to the position he holds in the competitive field.
  • How unique is my solution? When you can do something none of your tender competitors can do, price becomes less important. Following the above example of the green-keeping business, he owns a tractor towed machine that ‘cores’ a surface, an important factor for vigorous grass growth on areas like football fields. All of his competitors need to hire such a machine (sometimes from him) as the need arises which adds a significant cost to maintenance and a resulting reluctance, which often enables him to get a superior outcome.
  • How close is the strategic fit of the tenderer to the profile of my ideal customer? Every successful business has an idea of what their ideal customers look like, and the closer to the ideal profile a tenderer is, the more important it will be to win a tender that arises from them.
  • How does the job fit into the existing workflow? When you have a ‘hole’ in your work flow, filling it becomes more urgent, the alternative being to cover the overhead costs from reserves or remove them. When the latter course is taken, it can be hard to resource back up when the work flows in again.
  • How does the job fit my capability mix? A key part of having a profile of the ideal customer is that the mix of capabilities you can deliver exactly matches what is required by the tenderer. Having to buy in a capability you do not have is a strategic decision, and should be made carefully.
  • What is the net cash flow from the project over the life of the project? To do any sort of financial calculation, this forecast is an absolute necessity. It should be done in any case, as you are bidding for the contract, and therefore should have calculated your costs and the financial benefits and risks. This is all that is needed for a financial calculation.

 

Having determined how important the job may be to win, the task is to increase your chances and decide how much to invest in winning.

There are two variables, the amount you invest, and the chances of winning the tender. To do a financial calculation on the options, you could use a function called  ‘Net Present Value’  or NPV. We all recognise that a dollar today is worth more than a projected dollar tomorrow. The value of tomorrows dollar being reduced by  the amount of inflation, and the certainty of the projected cash flow from the project.

To do an NPV calculation, you need to have projected the cash flows to which you are applying the formula.

The NPV formula is simple in principal: Assume an amount of $20,000 is outlaid with the projection that in the following 3 years the project will deliver 100k/year positive cash flow in current dollars, and the discount rate is 5% to allow for 5% inflation.

The cash flow looks like:

$20,000 initial investment, followed by year 1 net cash flow of $100,000, plus year2  100,000 X .95 = $95,000 plus discounted year 3 of $90,250.

The net cash flow from the project is therefore $285,250.

Therefore the net present value of the initial investment at the end of the project is $285,525 – $20,000, or $265,525. In this case, it would seem that the investment of 20k in winning the tender would be a very good investment indeed.

The discount rate can be changed to reflect not just the future value of current dollars, but to also  reflect the risk of not winning. This can be a more complex calculation, but relatively easily done with a formula called Internal Rate of Return (IRR) available in every spreadsheet package.

These two calculations, NPV and IRR are routinely done in tandem by accountants to calculate a risk adjusted return from an investment.

When considering the question ‘how much should I spend on this tender‘ they will together be very handy tools.

Cartoon credit: Scott Adams and Dilbert.

That essential second value proposition

That essential second value proposition

Aug 13, 2018 | Customers, Leadership

At the heart of every successful business is a promise made by a business to its customers and potential customers:  Value  can be created for them by commercial engagement.

I have never done any sort of strategic or marketing program where the definition of the Customer Value Proposition is not front and centre.

Often this is expressed as an ‘Elevator Pitch’, a summarised articulation of how that value can be created, usually by highlighting a problem or circumstance that will be addressed by using the products being offered. The logic is that you have 30 seconds, no more,  to make an impression, and given that people are more interested in themselves that you, the way to get their attention is to direct that 30 seconds to telling them how you will make their lives better.

It is a really effective strategy, road tested and tuned over many years.

Why is it then  that we so often fail to do the same thing for our stakeholders, particularly our employees?

Logically, if we can articulate why we make their lives better by working there, beyond the need to put food on their table,  and a roof over the kids heads, the result will be a more motivated and engaged workforce.

The second value proposition therefore is the one we make to our employees.

In most foyers these days there is some sort of mission statement, or statement of ‘business purpose,’ values, or some such fluffy words that could apply to just about every business around.

Who does not want to work for a business that respects customers, shows integrity, and transparency in the way it deals with employees?

Would it not be better to craft a genuine second value proposition aimed at stakeholders? In most cases, it will be very similar to those used on prospective customers, the desired outcome is the same: engagement and motivation.

Therefore the best way to create an engaged employee group is to repeat your customer value proposition to them, over and over, so it is clearly understood. Then you ensure that the tools are in place to enable every employee to contribute to the propositions delivery, and most importantly, live it every day, in every decision made, and every action taken.

Cartoon credit: Hugh Mcleod at Gapingvoid.com

E.&O.E. Very thoughtful reader Craig Armour http://www.kcarmour.com.au/ pointed out the error in the last paragraph. How much better it would be to have the employees sufficiently engaged that they could repeat the CVP back to you. Absolutely right.

 

When is the best time to sell?

When is the best time to sell?

Jul 6, 2018 | Customers, Sales

Clearly the best time to sell is when the customer is ready to buy.

The challenge is that you have to know your customers well to be able to create some sort of relationship that evolves as they become more ready to buy, they are looking for some information you can provide, make an offer that is compelling, and so on.

Getting the ‘time to buy’ wrong is a common, basic and often terminal mistake.

A while ago (before the current Royal Commission was announced) I wandered into the local branch of my bank. I wanted to make a simple procedural inquiry, and make a cash withdrawal larger than the ATM would allow. The teller was pleasant and helpful, but at the end of the transaction, launched into a spiel about insurance, urging me to undertake a review of my insurance with one of their ‘experts’, guaranteeing to save me money.

Almost everyone buys insurance, usually multiple types, so it is a fair bet that something is coming up for renewal.

However, when I walked in, I was not  thinking about insurance, and felt no need for a review, despite being depressed at the cost every time I renew a policy.

Dead money, unless circumstances are against you and you need to claim, and then you still need to extract the money from the insurer. At the best of times insurance is a reluctant, even grudge, purchase. We all hate it, and prefer not to think about the almost always dead money represented by the premiums.

The young teller was very persistent, immune to a simple ‘no thanks’ so I had to be rude, and just walk away.  However, it was not her fault, there is  no doubt in my mind that someone disconnected with customers had decided that tellers were the ideal lead generators for insurance sales, and had schooled tellers in the pitch, then applied a KPI to them:

‘Sales pitches delivered, and number of reviews initiated’ . Pity the KPI is almost certain to annoy a substantial number of existing and possibly formerly loyal customers, and often make the person delivering it very uncomfortable. Hardly a great selling environment.

The best time to sell is when someone is ready to buy, delivering a ‘hard sell’ to them at any other time is a good way to ensure they will  not come back to you when they are ready to buy.

Header screenshot from the movie ‘Glengarry Glen Ross’

How will the banks ever recover our trust?

How will the banks ever recover our trust?

May 7, 2018 | Customers, Governance, Leadership

Over the last decade, banks, and other financial institutions have spent billions, I have no idea how many, but guess multiples,  on telling us they are our friends, there for us, reliable, trustworthy, yada, yada, yada.

That investment has gone.

Poof.

Billions gone in a puff of Royal Commission smoke.

Then the stinky smell of the smoke is intensified by the APRA report into the CBA, released on April 30th, which is critical of the internal management and governance of the CBA.  While the CBA has been in APRA’s gun, there is now no reason to believe that the others are not similarly tainted. Just look at that doyen of financial rectitude, AMP for evidence of that.

I am not sure how much we all knew before all this came about, as most of us seemed to know at some level we were being screwed by the financial institutions, but the extent has come as a surprise, even to the most cynical amongst us.

If the boards of all financial institutions are not deeply concerned with these issues, they should be, in fact I would contend they are not doing their job if they are not.

Which opens two key questions:

  1.  How they can possibly recover the trust of their customers and the community?
  2.  In the absence of that trust, what alternatives do we as customers have?

So what is it that the financial institutions need to do to earn back our trust, and once earned, keep it. Trust has to be earned, it is never just given.

  • Transparency. Until we are able to see all the squalid details of the financial business model, be able to make informed choices, and have the current bunch of directors acknowledge their individual and collective failures, we will never trust them again. Probably the only way forward is increased regulation, or perhaps a more meaningful application of the existing regulations. A change to mandatory fee for service rather than commissions throughout the industry would remove the cause of much of the dishonesty at an operating level. Trust is impossible without transparency.

 

  • Communicate relentlessly. Having something of value to say, and saying it consistently, in many different ways is essential. This does not mean more fluffy advertising, and competitive product pitches attacking us from every angle. It means that we, the customers, have to be able to understand the value that is added by our financial institutions, and the cost of that value.

 

  • Measure the right things. Every business has financial objectives to meet, but confusing those financial objectives with the behaviour that delivers them is a bad mistake. In the end, the financial results are the outcome of a whole range of activity and behaviour, which when right will deliver the results. The old adage that you get what you measure almost always applies, and the financial institutions have been measuring the wrong things.

 

  • Manage behaviour and build a new culture of service.  Ensuring that behaviour is consistent with a revised set of values that will apply is essential. These should evolve from the Royal Commission report and the need for every business to be able to define its purpose. The boards have a big task in front of them to change the cultural norms that drive behaviour.

 

  • Be prepared to  be wrong. When a mistake is made, and we all make them, admit it openly, while adding what you have learnt from the experience, and what you will do in the future as a result. The sight of various board members setting out to absolve themselves of responsibility is a very bad ‘look’ and should not be tolerated by us as consumers, or the regulators.

 

  • Take responsibility. Responsibility and accountability seem to be sadly lacking at present, and this needs to be reversed. Hopefully, it will evolve as part of the cultural renewal I optimistically forecast.

 

  • Be human. The pace of change has outrun our collective ability to absorb it. Automation in the name of efficiency is fine, until the automation removes people from the equation. People deal with people they know like and trust, so there is a real challenge for  the banks. Be known, liked and trusted again.

 

One of the structural problems the industry has to face is a very human one. We all want something for nothing, and nothing usually means we would rather pay more, but not see the payment to avoid feeling the pain. The result of this is the generation of hidden commissions, and sliding scale charges, rather than fee for service.  Commissions wherever I see them change behaviour, create a short term financial incentive, that is their purpose, and usually become a part of the status quo. In most cases, and certainly in the financial services industry, this practice is not in the best interests of  those who ultimately fund the commissions. The whole financial services business model is based on commissions, which is like building a skyscraper on quicksand, bound to unravel at some point.

Oops, I think it is unravelling!!

To the second question, the options we have as consumers: currently none. There are many alternatives, many touted differentiators, but in essence they are pretty much the same, it is just the details of the business models that vary a bit. However, malfeasance such as we are seeing has a way of adding fuel to the innovation fire, and I suspect there will be options opening up very quickly that deliver some if not all of the characteristics that will build trust from outside the traditional financial services industry. This will certainly give the regulators a headache, and boards something beyond their current horizons to think about.

I wonder if many of the legacy businesses will still be around in their current form in a decade? I doubt it very much. However, the point should also be made that it is the people who run and govern these businesses that are to blame, not the institutions themselves. The financial institutions play a vital role in our economic and social lives, and are indispensable, unlike those running them, many of whom should be dispensed with forthwith, without any form of golden handshake.  Indeed, many should be thankful they will not be measured for striped suit and a modestly furnished suite at Silverwater.

 

Cartoon credit once again to the great Hugh McLeod at Gapingvoid.com

What does the FMCG future look like?

What does the FMCG future look like?

Apr 27, 2018 | Customers, Innovation, retail

It is easy to be critical of just about anything, much harder to be constructive, and make suggestions about how to  change the things that attracted the criticism.

In my case, I have been critical of the retail gorillas, Coles and Woolworths for some time, specifically their capacity to change what appears to an outsider, to be their strategic priorities.

As a shareholder in both however, (via managed super rather than choice) I have been rewarded by the returns.

So, I am going to stick my neck out and make some observations, in no particular order, and would welcome feedback.

Delivery services.

Busy crowded lives seem to require a delivery service, and Coles and Woolies have dabbled in it with the delivery trucks we now see around. I have not used either, but several acquaintances have, several extensively, and generally just shrug with resignation at the inaccuracy, inconsistency and uncertainty involved, and wonder if it is worth it. Perhaps the order/pick-up combination will be the answer to the ‘last mile’ problem, as most of us have cars.

In the US there is a service called ‘Instacart‘ that appeared to be doing an ‘Uber’ on grocery shopping and distribution. In Australia, ‘Uber eats’ seems to be bobbing up everywhere, delivering from all manner of food service outlets. Shopping and delivering seems to be a small step to take, or just the delivery part after order assembly in store.

By contrast, Kaufland in Germany appears to have walked away from their on line grocery services, citing the costs of the ‘last mile’ making it unprofitable. This is in the face of Ocado in the UK seeming to go from strength to strength.

In summary, a lot of experimenting to do before the best model evolves, but the common element appears to be basket size. Encouraging on line shoppers of any sort to increase the order size makes some of the other problems less important. It is a standard retail metric, and even more appropriate for on line.

Digital marketing development.

Amazon has mastered the art of cross selling and using feedback to overcome the barrier of not being able to see, touch and feel products as you can in a bricks and mortar store. The current on line gorilla catalogues are just that, catalogues, little more. No cross selling, no recipes, no personalisation based on browse and purchase history, no seasonal suggestions beyond the digitisation of the generic  ‘shop now for Christmas’ stuff. With a few digital tweaks, the current catalogues look like the pages of Co-Op ads in the Wednesday afternoon  newspapers that used to be an important part of dealing with the gorillas.

Opportunity waiting?

Store automation.

Amazon has ignited retail with Amazon Go, poking into action all sorts of activity from the usual suspects as well as some unexpected places.

Hema supermarkets are quickly opening stores after 18 months of testing and development in a Shanghai pilot. Owned by Alibaba, the tech in these stores and the levels of service they offer will, or should concern the two Australian gorillas. Alibaba also has a pilot unmanned Tao coffee shop. I wonder at the quality of the coffee, but who would want to bet against that being commercialised?.  Another Chinese start-up called ‘Bingo Box‘ is planning unmanned convenience stores after a (reported) successful pilot in Shanghai taking Amazon Go type technology a step further.

It also seems obvious that there will be automation applied to the routine and labour intensive job of shelf filling, facing up, and highlighting offers of various kinds. Wal-Mart is experimenting with that idea in 50 stores, using robots to check inventory stock weight, location and pricing, and the other US retailers are not being left behind. Kroger is playing with mobile apps, to communicate offers, lists, coupons, and personalised messages, as well as scanning items in store to reduce checkout lines.

Supply chain automation.

Somebody, somewhere,  will apply Blockchain to the entire supply chain for a product. It will be  kicked off by a consumer taking a product from a shelf, being relayed back through the chain, creating production orders, invoices, inventory management, all ending up in an automated Kanban system at the store selling face, creating a genuine demand chain. The technology to do all this exists, in pieces, so putting it together will not be far off.

The only thing certain about the above thoughts is that there are many I have missed.

Photo credit; Mark Stevens via Flikr

6 customer service clichés deconstructed.

6 customer service clichés deconstructed.

Apr 11, 2018 | Customers, Marketing

It seems that every time I pony up for another insurance bill, I get one of those customer satisfaction surveys emailed within 24 hours, asking a few inane questions about my ‘experience’ and the level of service I received.

There is no room to say it was at best nondescript, often crap, that insurance is a cost I resent, am  suspicious of, and just hope that I never have to find out (again) if the after the disaster facts are actually as the advertising blurb promises.

Customer satisfaction indeed.

Normally I just ignore them, as responding only seems to encourage. (a bit like voting)

However, a recent emailed questionnaire got me thinking about what customer satisfaction really is, and how we go about creating and retaining such an ephemeral and personal idea.

Is it enough that we ‘satisfy’ our customers, and if so, what does that actually mean?

‘Delight our customers’ is a phrase that seems to have made it onto a few mission statements over the recent past. Is that one better than ‘satisfy’ or just more hyperbole?

Jeff Bezos famously demands that there be an empty chair in every meeting, a reminder that everything Amazon does is aimed at customer satisfaction. Reed Hastings has built Netflix from a minor irritation to Blockbuster into a digital entertainment behemoth by being ‘customer obsessed.’

If we are to be truly customer focussed, what should all  the common clichés really mean?

‘We listen to what our customers tell us’

Really? I listen to what my aging mother tells me, but do I follow the advice? Rarely these days. It should mean that we understand not just the words, but  the intent, and we use the information to test, and retest the delivery of our value proposition.

‘We obsess about customer satisfaction’

Most obsessions I have seen are all about the obsessor, rather than the obsessee. (are they really words?). It makes some feel better to tell ourselves we are obsessed with customer satisfaction, it justifies those long workshop sessions in a nice location. Most times when I go out and ask customers what they think of the level of service they receive, it falls short of satisfactory, let alone obsessional, and is markedly lower than the score businesses give themselves when asked the same question. It is easy to pass this off as delusional, but the reality is that customers rarely think about service until they experience it, and then only when it fails them. By contrast, companies are genuinely thinking about service consistently because it is important to them, but in an abstract way.

‘We understand what the customer expects of us’.

That is great, but also a bit unusual, as different customers almost always are looking for different things. In B2B businesses, it is essential that you understand the detail of a customer, and potential customers business processes so that you can really tailor your offering. A bit harder in B2C, but it is still true that individuals are seeking a range of different things that add up to ‘satisfaction’ in their minds. The real task is to create a situation where the customer sticks with you through thick and thin, simply because they believe you are better than any alternative.

‘We put customers in front of profits’

This gets trotted out regularly, without any understanding of the implications. The reason we have customers is ultimately, to make profits, and without profits, there will be no customer service at all. There has to be a balance, but it is true that satisfied customers lead to higher profits, it is a hard balance to get right.

‘The customer is always right’

The old perennial, and it has always been nonsense. However, treating customers with respect, humility and giving them the opportunity to be right is a great strategy. The most common example used is the retail  chain Nordstroms in the US. As the story goes, take a car tyre into Nordstroms and demand your money back because it was not up to expectations, and they will give it to you, despite not selling tyres. Perhaps it should be ‘The right customer is always right,’ to reflect the reality that there are some customers who are more trouble than they are worth, and you hope they go to your opposition.

‘The quality of our products speaks for itself’

No it does not! You need to speak for it. The base expectation of any customer is that the product you provide will deliver the outcome you promise. That is quality. A Hyundai will get you reliably from point A to Point B, does that mean it is the same quality as a Bentley, which will also get you reliably from A to B?. The answer to that question will most often be ‘No’  but then defining the ‘Value’ delivered by the extra few hundred grand to buy the Bentley becomes a different conversation entirely, with different customers.

Creating great experiences for customers brings them back for more, delivering revenue at much a reduced cost  than if you had to find a new customer. Share of Wallet and Lifetime Customer Value are the most undervalued measures of sales effectiveness, and also the most effective.