Tag Archives: Terms

Would You Dedicate Staff to a Single Client? Five Considerations

Situation: A company has received an inquiry from a large client requesting that they dedicate a significant portion of their staff to that client. The company hasn’t done this in the past, and the CEO seeks advice on the advisability of this choice. Would you dedicate significant staff to a single client?

Advice from the CEOs:

  • Provided that the terms offered by the client are favorable, the proposition may make sense. However, there are certain terms that you may want to assure are included in the contract:
    • In return for your dedicating choice staff to this project, ask for a substantial upfront payment – perhaps 50% of the total contract – to reimburse you for the opportunity costs that you incur committing your resources to the project.
    • Insist that the contract allows interchangeability of personnel if circumstances prevent initial personnel from continuing with the project.
  • Internally, work to assure that this project does not adversely impact your culture.
  • Talk to other companies that you know who have had similar arrangements with large clients. This will give you an understanding of the benefits and pitfalls of the arrangements.
  • Do everything that you can to assure that this project does not distract from your broader business strategy. Cash from the project may be nice, but if it inhibits your overall business strategy it may not be worth it.
  • If the employees assigned to this project are not happy with their assignment, the project may lead to unwanted turnover.

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Do You Continue a Difficult Partnership? Five Alternatives

Situation: A company has a key relationship with a major corporation. They recently completed work in Phase I of a multi-phase project which was fraught with difficulties. Now they are evaluating whether and how to proceed with Phase II. Do you continue a difficult partnership?

Advice from the CEOs:

  • What made Phase I difficult?
    • Initial work was done to original specs and on time. The partner then asked for additional work and a change to the original specs, but would not agree to pay for these changes. As a result, the company lost money on Phase I.
  • What alternatives exist?
    • In brief, you must fundamentally change the terms of engagement. You can convert everything to time and materials, so that when the partner makes changes or asks you to make changes, they pay as they go.
    • A second alternative is to reconstruct the project as a waterfall project with a fixed price up front. You agree to X iterations, at Y cost per iteration. Each iteration has a deadline and the work completed as of each deadline constitutes the final work on that iteration. You charge for additional iterations if the partner wants additional work after the final negotiated iteration.
    • A third alternative is to set a price that is 2x your estimated price, recognizing that there may be a need to change specifications during development. You will provide documentation of your time and effort. If at the agreed end of the project you have not used all of the funds budgeted, you refund the difference to the partner.
  • Adjust how you communicate with the partner as you renegotiate. Do not assume that silence constitutes agreement. Provide written documentation of your understanding at the close of each negotiation and invite them to correct any misunderstandings. Require that both sides sign this documentation to confirm agreement. Do not proceed until there is clear mutual understanding on all key points.
  • Purchase and use software to track any changes to requirements during the project. This will enable you to document both the changes requested and their waterfall effect on other portions of the project.

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How Do You Fund Growth? Five Points of Focus

Interview with Hannah Kain, President & CEO, ALOM

Situation: While funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growth?

Advice from Hannah Kain:

  • We focus on frugality and prevent wWhile funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growthasteful spending. However we invest in tools that enable staff to purchase wisely and stay ahead of customer demands. We also collaborate with vendors to manage costs.
  • As a result, the last two years have not forced us to change how we fund growth. We are getting large contracts and work globally to solve customers’ logistics challenges. Our challenge has been moving from centralized distribution to strategically placed centers around the globe, increasing inventory costs and cash needs.
  • Where we have changed is in how we negotiate terms and credit with our customers. We manage vendor accounts payable to maximize cash flow while treating them as business partners. This requires close vendor communications to assure that everyone’s needs are met.
  • We have been cautious with our banks and seldom dip into credit lines. Managing vendor payments has been more effective.
  • Essential to vendor communications are open sharing of information and goal setting. We work to create a team atmosphere. This is similar to what we do in our offices. In our experience, instilling the right culture is far more powerful than financial incentives.
    • We share information through all-hands company meetings and regular updates so that everyone gets the full picture.
    • We also share information with our vendors so that each side is aware of the other’s needs.
    • We create an annual one-page business plan for the company, and parallel plans down to the supervisor level. Performance against plans is updated regularly to assure that we remain on top of situations.
  • We focus training on new tools. Our staff gets technology they need to be successful.
    • We generously provide technology to our employees, provided that they give a logical business rationale. This includes home computers, iPhones or Applets to help them do their jobs.
    • Similarly, when a vendor or customer asks for a service improvement or a new service with a good business rationale, we invest to support this.
  • These methods have allowed us to finance most of our growth internally.

You can contact Hannah Kain at hannah@alom.com

Key Words: Funding, Bank, Institutional, Growth, Spending, Tools, Empower, Customer, Demand, Costs, Vendor, Cash, Needs, Terms, Credit, AP, Partner, Payment, Information, Sharing, Goal, Culture, Performance, Technology, Service

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What is the Best Response to a Price Cut Request? Eight Thoughts

Situation: A key customer just asked for a price reduction. Our raw materials costs have increased and eroded our margins. What is the best way to respond?

Advice from the CEOs:

  • Are you selling a commodity or a unique and differentiated product?
    • Commodities rarely command a premium above market unless you can bundle with differentiated delivery.
    • Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
  • The customer may have valid reasons to request a lower price.
    • Counter with a combination lower price and lower level product to retain your margins.
    • If the sale involves service, assign less expensive resources in return for a lower price to preserve margins.
    • Define the trade-off to the customer so that it becomes their decision, not yours.
  • Adjust your terminology. Use “run rate” vs. “price,” and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
  • Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.
  • Do NOT share your cost and margin information – as company policy.
  • Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.

Key Words: Price Reduction, Margin, Costs, Commodity, Differentiation, Counter-Offer, Resources, Terms, Delivery  [like]

How Do You Boost Short-term Cash to Finance Growth? Two Approaches

Situation: The Company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase our credit line. How can we increase cash flow and better position ourselves with the bank?

Advice from the CEOs:

  • First, try to speed payments from customers or delay payment to vendors.
    • Add a schedule of values to contracts to prompt earlier payment. Sweeten early pay terms.
    • Ask for money up front to cover out of pocket costs.
    • Ask vendors for additional time. They’d rather be paid later than not paid at all and can be surprisingly supportive if approached honestly.
    • Negotiate terms with customers and suppliers in advance. This gives you additional information to take to your bank.
    • Slow down longer pay term sales by raising prices to finance your cash flow needs.
  • Study the ratios that your bank requires in your line of credit agreement. Adjust assets and expenses to fit these requirements.
    • Can you time your sales between quarters to smooth performance?
    • Update inventory counts. Look for uncounted inventory.
    • Look at your equipment. Have you been expensing or depreciating it? Shifting big items to a depreciated basis can benefit cash flow statements.
    • Once you’ve gathered this information, see if your accountant can update or restate recent statements. You may be able to generate enough impact to go back to your current bank or approach a new bank to secure a larger credit line.

Key Words: Cash-Flow, Bank, Credit Line, Payments, Payables, Vendors, Early-Pay Terms, Terms, Inventory, Depreciation  [like]