In my last two posts I narrated some of my past experiences with analytics. In this post I take a break from past, and delve into present.
I intend to keep flitting between past and present in my future posts too.
How negotiating a better deal may turn out to being a losing proposition
Recently, a digital marketing company was looking for a business analytics solution that would enable them to predict, with reasonable accuracy, the probability of an inquiry on their portal converting into a potential win. The management believed that with the above solution in place, the company would achieve several direct and indirect benefits, the major ones being:
1) Reduction in its call center strength by 10% (on account of early weeding out of non-serious inquiries )
2) Improvement in its Inquiry-to-Business conversion ratio from 10:1 to 4:1 (on account of ability to put more focus on potential winnable inquiries)
The above benefits, if achieved, were expected to provide an estimated return on investment (ROI) of 720% on their investment cost on this solution over a period of 36 months (fairly reasonable for any BI/BA initiative).
The company had already identified and selected a solution provider, frozen on the system expectations, and was in the process of price negotiation. It so happened that the haggling over price went on for over two months, and ultimately the company was able to extract a 20% discount over what the vendor had earlier termed as its lowest quote.
Now in this whole process, did the company really gain? Apparently yes. But if you engage in a bit deeper analysis, probably not!
By delaying the accrual of direct and indirect benefits by two months, the resultant loss to the company was actually 20% of the investment cost as explained below.
a) Benefits foregone (that would have been available if the analytics system was in place) for 2 months – 40% of the investment cost (720% * 2/36)
b) Savings arsing out of price negotiation – 20%
Net loss = (a) – (b) = 40% – 20% = 20 % of the investment cost.
The above is an example of a scenario where an undue delay in price negotiation led to reduced benefits. However, delay in implementing an analytics solution for reasons other than price negotiation also may result in potential revenue loss, as is evident in the next example.
An example from the IT services industry
An IT services company with over 1,000 billable resources was intending to use a Business intelligence/Business Analytics (BI/BA) solution for significantly improving its resource deployment process. It expected that with a more accurate prediction of the resource demand from its sales teams, the company would be able to optimize and effectively manage its sourcing supply chain, resulting in at least 1% improvement in its resource utilization.
Even after selecting and engaging a competent firm to deploy the desired solution, for various reasons and lethargy shown by internal stakeholders, the implementation got delayed by over 3 months. What the company did not realize that in effect it had foregone the benefit (revenue) that would have accrued by having at least 10 additional resources (1% of billable resources) being billed per month for a period of 3 months. Even with a conservative billing rate of USD 16 per hour, that turns out be > USD 75K (with practically no additional direct cost, as the resource costs were already being incurred irrespective of whether a resource was being billed or not).
This effect (delays in implementation resulting in substantially reduced benefits) is evident not only in BI/BA implementations, but also in process improvement initiatives, as in the latter case too the ROI is proven to be a large multiplier.
That is clearly seen in the next example which is taken from the manufacturing industry.
ERP implementation in a manufacturing company
About 15 years back, a manufacturing company with an annual turnover of Rs. 120 crore (USD 28M those days) intended to implement an ERP system covering its entire operations including Finance. The purpose was to benefit from the implementation of the best practices, and thus gain several direct and indirect benefits. The company expected that with an ERP implementation, the streamlined operations and adoption of best practices would result in at least an increase of 1% in its Net Profit (at that time hovering around 10% of revenue).
I was part of the vendor evaluation panel that was set up to decide on whether to go in for SAP or Oracle Financials.
Even after few months of extensive presentations and competitive pricing by both the vendors, the panel was none the wiser to decide on which ERP to go for. Finally after several more meetings, based on various parameters evaluated, the panel decided on a particular vendor. Now it was the CFO’s turn to step in and take over the final price negotiations, and he expected that process to take another month.
I remember, I offered just one advice to the panel members at that stage. I reminded them that the expected benefits from the implementation were Rs. 10 lac (USD 24K) (1% of Rs. 10 crore) per month. Therefore I reasoned that the CFO should be treated as successful in negotiations only if he was able to extract a discount that was over Rs. 10 lac.
Not delaying does not mean rushing headlong into implementing analytics
The above illustrations just bring out the need of being aware of when one reaches an inflection point in negotiations, beyond which any further delay in decision-making may become counter-productive.
Having said that, I agree that all major BI/BA and process improvement initiatives are undoubtedly (very!) risky affairs. An organization cannot be rushed into taking a hasty decision. If not properly designed or scoped, these implementations might result in significant losses by way of reduced or minimal benefits. Before plunging into any such implementation, the organization has to weigh all the associated risks, and draw up appropriate plans to mitigate those risks.
But what I opine is that, once an organization has completed all due-diligence and decides to go ahead, it is prudent for the decision-makers to be cognizant of the resultant impact of any further delays in implementation.
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