It Is Time To Renegotiate Everything
February 15, 2011 Stuart Kahan
At the Federal Reserve Bank in lower Manhattan, machines have been installed in the cafeteria. They dispense one napkin and one piece of plastic ware at a time. No longer is the supplier simply dumping napkins and forks, spoons, and knives into big buckets for the employees to take whatever they want. “Money had to be saved,” said Michele Lamourt of the Fed’s Analytical Support Unit. “We used to be able to grab a bunch if we wanted to, no longer.” In fact, the cafeteria has stopped subsidizing the food. Contracts have been renegotiated so that employees now have to pay normal prices. “It’s double the cost of what we used to pay,” she added.
In the for-profit world over at Ross Stores’ corporate headquarters, Sarah Nagel, senior buyer, reported that in the office supplies area, contracts have been renegotiated with vendors to supply off price/brand products. “As a result, we are only allowed to buy products for which we have a special contract. So, there are few styles of pens, pencils, notebooks, and the like.”
In the nonprofit world, Marcia Weinroth, former executive director of The Reform Temple of Forest Hills in New York City, said that she saved money by renegotiating copy machine and office machine contracts. “We had no choice. If the company wanted our business, they had to realize our needs. We had to shift from a lease arrangement to an outright purchase, and fortunately, a congregant helped us with that.”
And at Touro College, also in New York City, health insurance contracts were reopened with results that might not be so favorable to the employee, who now must pay more in premiums for fewer benefits.
From government to the for-profit world to nonprofits, it is the same old song being sung in this economic turndown: money has to be saved and one specific way to do this is to reopen or renegotiate contracts with vendors, suppliers and providers of all kinds.
Managers at the Georgia Center for Nonprofits in Atlanta said that the reality for a nonprofit operation is a clear and yet troubling equation: every $1 spent on pencils, note pads, computer keyboards, or printing equals $11 that must be earned via fundraising. This conundrum produces a challenging issue of cutting operational purchasing costs by employing the economies of scale and efficiencies.
The Center, an association for nonprofit, charitable organizations, helps nonprofits manage their services better by offering information, training, consulting, and even nonprofit jobs services. It took up the challenge with a research project and unearthed the following: * Procurement at nonprofits consumes as much as 70 percent of annual funding; * The majority of purchases are made with no strategic contracts in place geared toward savings; * Smaller nonprofits lack the purchasing volume to leverage discounts; * There is an overall lack of expertise about strategic sourcing and lack of available staff to handle any concentrated procurement effort; * Purchasing managers are spending more than one-third of their time on paperwork; and, * Spending outside of approved systems drives up total costs because few nonprofits have a contracted discount with a supplier. In fact, fewer have a way to track how many employees adhere to that contract.
As a result of its comprehensive studies, the Center devised an e-procurement system that is available by contacting www.gcn.org.
Karen Beavor, the chief executive officer and president of the Georgia Center, explained that for-profit companies usually get discount prices on many of their purchases and these discounts can represent significant and immediate hard dollar savings of up to 35 percent, depending on the specific spending category.
Nonprofits often lack the clout to negotiate discounts regularly doled out to big businesses, such as below-market pricing on certain big-ticket items such as computers and security systems.
Beavor said she finds that the benefits area is at the head of the list for renegotiation. “Keep in mind that a nonprofit is not in the manufacturing industry. They have to understand where they are spending most of the money and that it’s usually with insurance, whether health or general liability. Next comes office supplies, followed by printing, postage, and food services, especially the cafeterias at schools and camps. When it comes to renegotiating, nonprofits have to give a haircut on spending. That’s crucial,” she said.
Those who are responsible for renegotiating contracts with vendors are well aware that different strategies are in play, depending on the particular specific buyer/supplier relationship. For example, an aggressive strategy might work if the buying company represents a large percentage of a supplier’s business versus a small one.
That being said, the following are some of the strategies heard over and over by many administrative people who utilize renegotiation tactics in this recent economic market shift:
* You must be able to quantify what you want. If it’s solely a price reduction, then the only way a supplier will consider any change at all is if you can show specific information — perhaps market data — that your new price request is justified.
* You must enter into discussions from the vantage point that you are trying to build a lasting relationship rather than simply saving costs. It might not sound logical but it is because you are seeking to establish a longer-term relationship rather, than just going to the lowest bidder. In this respect, many buyers are starting to resort to what is called the “survival argument,” by saying that if costs are shared, this would ultimately result in better financial health and more likelihood for growth.
* You must make the argument that prices have been typically increasing more gradually so there has been time for suppliers to adjust their prices during the past year or two. Again, the key here is to document the history of any recent price changes and to be able to quantify the difference between current contract prices and the current true market price.
Of course, if you are already dealing with a longer-term fixed price contract that you find too unfavorable, you have to renegotiate to a lower price in exchange for an increase contract length. Mike Petro, who analyzed chain options and competitive pricing for US Steel, said that extending a contract from a one year to a two-year deal in exchange for a 15 percent drop in price is a good example and also represents a chance to add a price adjustment clause if one doesn’t already exist.
Finally, rather than just discuss price decreases, nonprofits should use this renegotiating time as an opportunity to get the supplier to suggest some changes the buyer can make to help the supplier’s costs. Again, according to Petro, making a minor change to a specification, release quantities, packaging, and the like might not be a significant change for the buyer, but it could allow the supplier to cut costs. It’s also a good bargaining chip to offer in exchange for a renegotiated contract price.