Category Archives: Market Intelligence

Are You Paying Too Much For Your Power? (Energy Sourcing)

A recent article over on Supply Management . com which literally asked if you had “money to burn” brought up two very good points:

  1. Buying energy in a volatile market demands specific skills.
  2. In this economy, you can’t overlook your energy costs if you’re in a market where you have a choice.
    In the UK and many states in the US, a business with high energy costs can save millions, if not tens of millions, a year with a well negotiated energy contract. (Savings of 20%+ are not uncommon for some of the energy sourcing specialists.)

Considering that energy prices have increased at an annual average rate of 15% per year in the US over the last decade, and continue to increase, the savings opportunity for a company that has never sourced energy in a competitive market is tremendous. But buying energy is not easy.

First of all, as the article points out, if you wield a big stick you can expect to see “lights out” as energy suppliers, who know their product is in demand, know that you don’t have a lot of options and that if you’re unreasonable, everyone else will walk away too and one way or another, they’re going to sell their product, which is in ubiquitous demand, and make a profit.

Secondly, you have to understand the factors that impact the pricing, what can be fixed, what must be left variable, what can be negotiated, and what can’t. If you’re buying energy, there are often raw material (oil, coal, natural gas, etc.), generation, transmission, and distribution costs. Depending on the market, the raw material costs may be variable and tied to indices (especially if the raw material is natural gas or oil). The generation costs are usually fixed per energy unit. The transmission costs, which generally refer to the costs of moving energy from the source of generation to local distribution systems, may be separate from the distribution costs, which generally refer to the costs of delivering energy to your facilities via the local distribution systems, if the provider has to use third party lines. The transmission and distribution costs can usually be fixed (per energy unit) as well.

Thirdly, you have to understand that the biggest savings usually result from longer term contracts, especially when you are able to lock in fixed prices (across the board). A one year contract is not very attractive to most providers, especially if you want fixed costs, but a three year to five year contract can be very attractive and incentivize the provider to offer significant discounts (because they know that even though commodity markets can go haywire in the short term, costs always trend rather predictably when smoothed out over the long term).

Fourthly, you need to be familiar with the standard agreements and clauses that an energy provider will insist on, or negotiations will take a long time at best, if they don’t fall apart. You need to be familiar with the local legal and regulatory requirements, so you know what is negotiable, and should be familiar with the Base Contract for Retail Sale and Purchase of Natural Gas and Electricity that was made available for download by the North American Energy Standards Board in 2006. (NAESB WGQ Contract Standards and Models) As with any RFP, the presentation of a standard contract up-front, with blanks for the costs and terms under negotiation, can greatly speed the process.

Fifthly, you need to use a best-of-breed e-Sourcing tool to manage the process so you can build TCO models and maximize your return from the sourcing effort. If your sourcing tool is not amenable to the quirks of an energy model, consider using a dedicated energy tool provided by the energy experts, such as Energy Window or Power Advocate.

Sourcing energy might seem strange, and it might be complex, but if energy costs are a significant percentage of your budget, can you really afford to leave millions on the table?

Marketing is NOT Optional!

Although it was targeted at retailers, a recent Harvard Business Review article titled “How to Market in a Downturn” made a good point that enterprise software and solution providers need to heed, especially if they want to not only survive this downturn but pick up new business. The message is this: “Marketing is NOT optional.”

Here’s the Catch-22: if companies don’t market, buyers don’t know they exist. And if too many companies trim their marketing budget to zero, advertising channels begin to shut down (as newspapers are doing), further narrowing opportunities for customer acquisition. In the sourcing vertical, now more than ever, buyers need a solution that can help them reduce and avoid costs, so they can notch an ROI quickly. If you’re a services provider (for example, an expert consultancy in category cost reduction or spend analysis), or a SaaS vendor with a low cost of entry, your time to acquire new customers is now — but that’s going to be difficult if customers don’t know you exist. Ironically, if your potential customers aren’t able to get the help they need, which will be tough if they can’t find you, then they could go out of business as well, taking with them an account that you’ll never win.

As the HBR article pointed out, building and maintaining a strong brand — one that customers trust — remains one of the best ways to reduce business risks. IBM, who had a record profit last year and who recently announced that they plan to have another record profit this year, has spent decades building their brand. Closer to home, Ariba, Oracle, Emptoris, and other big names grab the lion’s share of the spend management business, funding, and buzz. They are names people know, because, year in and year out, they make sure people know them and what they do. Are they the best solutions? With regard to most of their spend management offerings, they are not the best, sometimes not even close to being best. But that doesn’t matter, because everyone knows who they are and they get invited to almost every RFP, while most of their best-of-breed competitors, who haven’t done enough marketing (or, these days, aren’t marketing at all) aren’t invited to the party.

Now, you’re free to believe what you will and disagree with me, but from where I sit, this is what I see: any vendor who doesn’t market is likely to be among the next to go. This prolonged recession is busy doing what years of M&A activity couldn’t, namely, condensing the market to a small handful of key players for each technology and services offering. A number of providers in this space, who thought they could forego all marketing, halt new product development, stick their heads in the sand, and wait it out, have already undergone significant layoffs, and I know of a few who are on the block. I thoroughly expect that more folks who have adopted the conserve-cash and wait-it-out strategy will join them in the year ahead, especially those that simply don’t have the cash reserves or the steady revenue model that will allow their competitors, but not them, to survive.

Thus, if you are an end user, it’s very important to take a good look around and see if you notice your vendor. If they no longer take out advertisements, go to trade shows, host webinars, or appear on the blogs, chances are they’ve stopped marketing. A muzzled marketing department is often the canary in the mine, and it can mean that pipelines have dried up and new deals aren’t closing. Note that this is especially true of traditional software companies whose revenue models rely on hefty up-front payments from new sales. Such companies are particularly vulnerable to dry pipelines, whereas companies using a sales or services model that yields a steady revenue stream are much less vulnerable.

If a company doesn’t have enough customers to sustain themselves at their current level of operation, you’ll see them slashing head count. This is pretty much guaranteed to affect your service level. And if they were already operating at a minimal level of staffing, as many of them were before the downturn, then there’s a chance they could cease operations altogether, leaving you high and dry.

So, take a good look around and make sure your vendor is visible. If they’ve gone radio silent, it would be a good idea to take the time to ask them how they’re doing, and not let up until you get a straight answer. Don’t be afraid to ask them, point-blank, what happens if they don’t get any new customers for a whole year (which is a question you should ask every SaaS provider anyway). If you don’t like the answer, considering looking for a more stable provider. The last thing you can afford in this economy is to be left high and dry when you are depending on critical cost-saving e-sourcing and e-procurement software.

Training Doesn’t Have to Be a Budget Buster

I was glad to see this recent article in Industry Week which echoed a key point I’ve been trying to make over the past few years, that “training doesn’t have to be a budget buster” and that affordable options are available.

Consider the following options outlined in the article:

  • Onsite
    Bring in an expert instructor for hands-on training. You’ll get a lot of bang for your 2K a day, especially if you qualify for federal reimbursement under the Workforce Investment Act of 1998 which can see you getting a reimbursement of 60% to 100%. Alternatively, you can send two employees to a train-the-trainers program, and they can pass the knowledge on to your entire workforce.
  • Seminars
    Instructor-Led seminars limited to 10 students insure that each student gets instructor time and maximizes the information transferred.
  • Online Training
    There are a slew of affordable on-line and distance training options these days, some of which even come with certifications for less than you’ll likely pay for your shiny new iPhone over the course of a year.
  • Local Colleges / Trade Schools
    Many of these have very cost effective programs, especially if they are state or province (co) sponsored for local students.
  • Simulation Software
    Allows students to learn through tutorials and trial-and-error without risks to equipment or currently operating processes, often for just a few hundred dollars per student.
  • Webinars
    A sequence of properly selected webinars can often provide basic information at little or no cost.

So where can you find these resources? Start with the Sourcing Innovation Resource Site which lists dozens of affordable seminars, classroom training, and on-demand online training options as well as hundreds of archived webcasts and podcasts.

Why Some Companies are Being Dumb

A recent article in Strategy + Business attempted to address why some companies are making the wrong moves. Needless to say, after my recent dumb company and dead company series, it caught my attention.

According to the article, some of the reasons companies are making the wrong moves are:

  • Market Optimism
    They think they’re better off than their competitors and that the crisis will serve to elevate them by harming their competitors more.
  • Overestimating their Financial Strength
    They are not accelerating their cash generation and, more importantly, cash preservation efforts.
  • Pulling Back on M&A
    When now is the best time for strong and stable companies to snatch up struggling companies with innovative products.
  • Mistrust of Senior Executive Leadership
    A recent survey by Booz & Company in December of 2008 found that two out of every five respondents were skeptical of senior executive plans, which, of course, affects their ability to carry those plans out.

I don’t think it captures all of the reasons, from what I’ve seen and heard over the past few months, but it’s certainly an important set of mistakes to avoid.

If You Fall For “Free” Then You’ll Get Suckered!

Money’s tight, the recession is still in full swing, everyone’s telling you to get a good deal, you’re starting to fall for “freeconomics”, and that’s a BAD thing. Anderson’s Claim that $0.00 is the Future of Business is false. Just because something, like the cost of software, is trending towards 0, that doesn’t mean it will ever reach 0. Zero is a limiting value. If you understand mathematics, that means that it will only reach 0 when an infinite number of instances are in play. Furthermore, a product that is consistently dropping in price month after month on a well defined curve could be trending to any point between the current price and zero on that curve … there’s often no way to say for sure, since you can only say with probability that the model is right, not with certainty.

As a recent Knowledge @ Wharton article points out, products and services offered for free aren’t really free; they’re just paid for in another way … and in business, the way they’re paid for is often more expensive than just buying them outright, especially when we’re talking about software.

Free services? Chances are those required a multi-year commitment at a monthly price point that is high after 12 months, really high after 24 months, and exorbitantly high after 36 months. Chances are you were offered the deal because the vendor sensed the disruptive entry of a new competitor or price point that was going to significantly erode their margin, and in return for this “concession” they could lock in a 300,000 deal for 50,000 worth of services (for example) knowing that if you waited six more months, you could have acquired the same deal from a competitor for half that. Free? Try twice as much! Same goes for “free” training or “free” modules.

Marketers know that “FREE” spikes demand in a nonlinear fashion and that the number of people who will irrationally want something that is “FREE” is many times that will want it even if it only cost a penny. And since enterprise negotiations are always done with a person, they use that fact to their advantage to try and draw your attention away from an overpriced product or service to a “free” offering that is nowhere near as valuable as it sounds.

And even if it is free with no visible strings attached today, you can bet those strings will magically appear tomorrow. Consider those social networks you like so much. Spoke is selling your profile data. Facebook recently decided that they “owned” your information. Sure they reversed that decision, but they’re still retaining the right to use that information … and just because you delete something from the site, that doesn’t mean it gets deleted from the backups. What happens to that data? And you can bet the investors who just poured 35 Million into Twitter are going to want to see that money back. Those context-sensitive ads you were complaining about on MySpace and Facebook last year might seem benign in comparison!

There’s no free in business (to business). There never was. There never will be. So don’t get suckered, no matter how tempting it is in this economy. The best deal you can get is getting a product or service for what it’s worth, and not a penny more. Then you’ll have value, and you won’t be on the hook for an unreasonable expense down the road.

(And don’t try to tell me Open Source is free. It’s not. There are restrictions around use that could be very costly if you violate them — just ask an attorney specializing in the matter. And it’s unsupported, so there’s the support cost of installing it, patching it, and supporting your users on it which can’t be passed off even partially to the vendor. And if it has a bug you can’t work around, you have to write your own patch. Developer’s aren’t cheap. That’s not to say that it’s not the best deal, but that you don’t know until you do a TCO/TVM model over the intended lifespan of the product.)