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Ensuring Long-Term Supplier Service

PurchTips - Edition # 36 November 18, 2003

By Charles Dominick

 

Will You Get The Service You Deserve Next Year?

When you're an "Important Customer" to a supplier, your needs get immediate attention. You don't have to be a huge company to be an "Important Customer." That doesn't hurt, but there are other ways to become and stay important to your suppliers. Let's explore one approach.

In contracts involving multiple payments, a supplier wants as much money as possible up front. This may lead them to desert you towards the end of the contract when their revenue from you is small and their revenue from new customers is large. So it's better for you to have an arrangement where less money is paid in the beginning of a relationship and more is paid in the end.

Here's an example of a typical initial proposal from a software supplier for a three-year contract:

Cost Component	Amount	Payment Due
Licensing Fee	$165,000	Upon signing
Implementation Fee	$150,000	After implementation
Maintenance Fee	$60,000	@ start of each year
TOTAL	$495,000

Of course, you're going to negotiate this offer, right? A revision left up to the supplier may reduce the licensing and implementation fees by 20% and reduce the annual maintenance fee to $20,000, resulting in a total cost of $312,000 and a savings of $183,000. That's a nice savings, but the arrangement makes you less important as time goes on. A better way to restructure the pricing and achieve the same savings is as follows:

Cost Component	Amount	Payment Due
Licensing Fee	$72,000	Upon signing
Implementation Fee	$60,000	After implementation
Maintenance Fee	$60,000	@ start of each year
TOTAL	$312,000

By distributing costs towards the end of the contract, the supplier has a financial interest in being responsive late in your relationship. Other ways of staying important include using option years, termination provisions, and liquidated damages clauses in your contracts. So the next time you are about to finalize a long-term relationship, consider how you are going to remain important to your supplier throughout the entire contract.

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