Learnings from a startup: Part 2 - The Purchase Guy
Every large company has a Purchase Department through which all orders it places must pass. If managed well, this is a good thing for the large company. It has a bunch of people who, in theory, are always on the lookout for efficiencies in purchases - leveraging purchases across departments, finding products or services of lower cost and ensuring that someone in the Materials Dept is not favoring his brother-in-law against a lower-cost supplier.
For the vendor to the large company, this translates to the grim fact that the purchase guy exists for the sole purpose of driving your quote down. He will point out deficiencies in your offering. He will compare you against larger vendors who have efficiencies of scale. He will inform you of competing quotes that are much lower than yours. He will hint at a continuous stream of orders in the future if you manage to sell this one at a discount. And so on.
I am not trying to say that the Purchase Guy is Evil. On the contrary, I know of instances where the Purchase Department has worked with vendors to bring down their costs without impacting their bottomline. One of my friends, who is a vendor to a large automotive company, narrated how his client actually brought down his costs - and consequently his billing - by getting him better deals on some of his input services, which in turn he used to strengthen his margins with other clients.
However, if you're running a specialized services startup, chances are that the Purchase Guy is completely clueless on what it is that you do, and unable to offer any constructive criticism on your operations. However, his mandate of reducing his company's costs still remains, causing much frustration to you. In such situations, the only way you can stand your ground is to:
It is sometimes unclear whether there is a purchase department at your client and whether it is going to be involved in the sales process. Purchase has popped up at random times with existing clients, after we have done several projects without them. Sometimes, new clients have given the indication that the proposal will only be a formality, and they are ready to begin working with us. This idyll was then broken with a phone call from the Purchase Guy.
Thankfully, although we are weak on both 1 and 2, we have done a good enough job on 3 and 4, so that conversations with the Purchase Guy are always pleasant and occasionally humorous. Sample the following:
1. Help me find meaning in my existence
Purchase Guy: I see that you have quoted Rs <100>. This is too high. Let us bring it down to say, <75>.
My Colleague: Yipes! Where did you spring from? If I knew Purchase would be involved, I'd have changed the strategy. Let me requote you Rs <110>, then we shall bring it down to <100>. Both of us are happy.
PG: (slightly unsettled) Er, unfortunately your proposal is already recorded in our system.
MC: Well, your engineer really wants this work to begin fast and is ok with the quote, so how if we go ahead with the existing figure of <100>? That way, we don't lose time in requoting and waiting for the fresh purchase order.
PG: If you don't bring down the price, we shall consider other vendors.
MC: Look, this project is really urgent and we are the only ones around who can deliver the quality needed on time. If you want to look at other vendors, all the best explaining that to the engineer.
PG: (helpless now) Please help me out. My performance will be evaluated on whether I can bring the price down.
MC: Giving discounts is against our policy, but for you, I'll make a special exception and change our quote to Rs <99>.
PG: (slightly relieved) Thank you. Have a good day.
2. Offense is the best form of defense
PG: Hi there! I'm calling from the Purchase Department. I notice that you've quoted Rs <100>. This is too high, can it be lowered?
Me: No.
PG: But it really is a high figure.
Me: On what basis do you say it is high? Have you compared costs among other vendors?
PG: Er, no.
Me: If you do that, you'll find that people will quote you 1.5 to 2 times what we have. And those guys will definitely not have the background that we offer.
PG: Well, that may be so, but your quote is still too high on absolute terms. It is out of our budget.
Me: That is strange, because when I met the VP of your company on his invitation, and agreed to his proposal on the project, he did not tell me he had no budget for it.
PG: So shall we say Rs <90>?
Me: Let's say Rs <95>.
PG: (brightening) Great!
Me: ... but only if you pay me completely in advance.
PG: Hm, our finance department won't agree to that. But do reduce your price, we'll give you lots of projects in the future, and this would be a goodwill gesture from your side to begin the relationship.
Me: Great! If you give me a commitment for 10 such projects in the next one year, I'll bring down the price considerably.
PG: Er... unfortunately, I can't do that.
Me: A good negotiation always involves give and take. I can't give you any discount unless I get something in return. Realistically, what can you offer me if not advance payment or a bulk contract?
PG: Nothing, really.
Me: Then the quote stays at <100>.
(two days later, we got the purchase order for <100>)
3. Completely clueless
(Background: My company is into Finite Element Analysis. Involves looking at mechanical structures and seeing how strong they are. This proposal was for a small half-month project involving Finite Element Analysis. I'm guessing that after seeing the purchase order request from his engineer, the Purchase Guy must have done a quick search in his database of the vendors doing analysis work. Resulting in...)
PG: You know, your quote is very high.
KP: Well, we deliver an equally high quality that justifies it. You've noticed it in the past projects we've done for you, and also the good reports on us given by your clients.
PG: That's all fine, but if I divide the quote for the project by the amount of time it will be completed in according to your proposal, I get a figure of Rs <100> per man-month. This is too high. Why, Lehman Brothers charges us Rs <90> per man-month.
KP: But aha, there you have it. If you give us continuous long-term work, we can definitely offer you the Lehman Brothers rate. But given the one-off short nature of this work, the overheads are bound to be high and thus the rate.
(...)
I learnt about the above since I was in the same room as KP, and overheard Lehman Brothers being mentioned. Later:
Me: Lehman Brothers? Why?
KP: Yeah man, they must be doing some financial analysis for our clients. I thought it futile to explain to the Purchase Guy how it is completely different from finite element analysis.
Me: But there's no way they could even charge Rs <100> a man-month. Why, their starting salaries for their employees were higher than that.
KP: Well, it was a purchase guy, he was most likely bluffing.
Me: You should have told him that was probably one of the reasons they went bankrupt...
For the vendor to the large company, this translates to the grim fact that the purchase guy exists for the sole purpose of driving your quote down. He will point out deficiencies in your offering. He will compare you against larger vendors who have efficiencies of scale. He will inform you of competing quotes that are much lower than yours. He will hint at a continuous stream of orders in the future if you manage to sell this one at a discount. And so on.
I am not trying to say that the Purchase Guy is Evil. On the contrary, I know of instances where the Purchase Department has worked with vendors to bring down their costs without impacting their bottomline. One of my friends, who is a vendor to a large automotive company, narrated how his client actually brought down his costs - and consequently his billing - by getting him better deals on some of his input services, which in turn he used to strengthen his margins with other clients.
However, if you're running a specialized services startup, chances are that the Purchase Guy is completely clueless on what it is that you do, and unable to offer any constructive criticism on your operations. However, his mandate of reducing his company's costs still remains, causing much frustration to you. In such situations, the only way you can stand your ground is to:
- Do a great sales job, so much that your end client wants you and nobody else.
- Give a higher quote in the first place, thus giving some satisfaction to the Purchase Guy when he brings it down to your original figure.
- Offer a product or service that is unique and not yet commoditized
- Have nothing to lose, or at least pretend that you don't
It is sometimes unclear whether there is a purchase department at your client and whether it is going to be involved in the sales process. Purchase has popped up at random times with existing clients, after we have done several projects without them. Sometimes, new clients have given the indication that the proposal will only be a formality, and they are ready to begin working with us. This idyll was then broken with a phone call from the Purchase Guy.
Thankfully, although we are weak on both 1 and 2, we have done a good enough job on 3 and 4, so that conversations with the Purchase Guy are always pleasant and occasionally humorous. Sample the following:
1. Help me find meaning in my existence
Purchase Guy: I see that you have quoted Rs <100>. This is too high. Let us bring it down to say, <75>.
My Colleague: Yipes! Where did you spring from? If I knew Purchase would be involved, I'd have changed the strategy. Let me requote you Rs <110>, then we shall bring it down to <100>. Both of us are happy.
PG: (slightly unsettled) Er, unfortunately your proposal is already recorded in our system.
MC: Well, your engineer really wants this work to begin fast and is ok with the quote, so how if we go ahead with the existing figure of <100>? That way, we don't lose time in requoting and waiting for the fresh purchase order.
PG: If you don't bring down the price, we shall consider other vendors.
MC: Look, this project is really urgent and we are the only ones around who can deliver the quality needed on time. If you want to look at other vendors, all the best explaining that to the engineer.
PG: (helpless now) Please help me out. My performance will be evaluated on whether I can bring the price down.
MC: Giving discounts is against our policy, but for you, I'll make a special exception and change our quote to Rs <99>.
PG: (slightly relieved) Thank you. Have a good day.
2. Offense is the best form of defense
PG: Hi there! I'm calling from the Purchase Department. I notice that you've quoted Rs <100>. This is too high, can it be lowered?
Me: No.
PG: But it really is a high figure.
Me: On what basis do you say it is high? Have you compared costs among other vendors?
PG: Er, no.
Me: If you do that, you'll find that people will quote you 1.5 to 2 times what we have. And those guys will definitely not have the background that we offer.
PG: Well, that may be so, but your quote is still too high on absolute terms. It is out of our budget.
Me: That is strange, because when I met the VP of your company on his invitation, and agreed to his proposal on the project, he did not tell me he had no budget for it.
PG: So shall we say Rs <90>?
Me: Let's say Rs <95>.
PG: (brightening) Great!
Me: ... but only if you pay me completely in advance.
PG: Hm, our finance department won't agree to that. But do reduce your price, we'll give you lots of projects in the future, and this would be a goodwill gesture from your side to begin the relationship.
Me: Great! If you give me a commitment for 10 such projects in the next one year, I'll bring down the price considerably.
PG: Er... unfortunately, I can't do that.
Me: A good negotiation always involves give and take. I can't give you any discount unless I get something in return. Realistically, what can you offer me if not advance payment or a bulk contract?
PG: Nothing, really.
Me: Then the quote stays at <100>.
(two days later, we got the purchase order for <100>)
3. Completely clueless
(Background: My company is into Finite Element Analysis. Involves looking at mechanical structures and seeing how strong they are. This proposal was for a small half-month project involving Finite Element Analysis. I'm guessing that after seeing the purchase order request from his engineer, the Purchase Guy must have done a quick search in his database of the vendors doing analysis work. Resulting in...)
PG: You know, your quote is very high.
KP: Well, we deliver an equally high quality that justifies it. You've noticed it in the past projects we've done for you, and also the good reports on us given by your clients.
PG: That's all fine, but if I divide the quote for the project by the amount of time it will be completed in according to your proposal, I get a figure of Rs <100> per man-month. This is too high. Why, Lehman Brothers charges us Rs <90> per man-month.
KP: But aha, there you have it. If you give us continuous long-term work, we can definitely offer you the Lehman Brothers rate. But given the one-off short nature of this work, the overheads are bound to be high and thus the rate.
(...)
I learnt about the above since I was in the same room as KP, and overheard Lehman Brothers being mentioned. Later:
Me: Lehman Brothers? Why?
KP: Yeah man, they must be doing some financial analysis for our clients. I thought it futile to explain to the Purchase Guy how it is completely different from finite element analysis.
Me: But there's no way they could even charge Rs <100> a man-month. Why, their starting salaries for their employees were higher than that.
KP: Well, it was a purchase guy, he was most likely bluffing.
Me: You should have told him that was probably one of the reasons they went bankrupt...
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