Tuesday, May 04, 2010

Looking Beyond Rates: Fundamentals of good contract negotiations go far beyond mere pricing

Pure data can provide valuable insight, but it doesn’t tell a complete story.

Hiding behind pure numbers will only create a one-sided, noncompetitive, zero-sum contract winner — and doom the negotiations, to failure.

The recovery is here, and not a moment’s too soon. Shippers and carriers across all transportation modes that have struggled through the Great Recession, suffering billions of dollars in losses and setting back their business by years, are feeling better about the economy and trade environment than at any point in the past two years. Retail sales are surging, and dramatically depleted inventories are being rebuilt.

And, after a rare high-profile public eruption over winter cargo backlogs wrought by capacity constraints resulting from carriers’ survivalist mentality, shippers and carriers appear to have found middle ground in attempting to resolve their differences instead of bickering about them.

It is, indeed, a new world order — or appears to be. But the true test of how both sides react will come in the next several weeks, as shippers and carriers wrap up what could be the most important contract negotiations in years, if not more.

Will carriers be true to their word and end the slash-and-burn rate-cutting wrought by their pursuit for market share? Will shippers become true partners in a market where success and speed to market can be determined by the success of their transportation providers?

Will the empathy and collaboration that both sides have long pursued but seldom achieved finally have staying power, or will both sides retreat into their business-as-usual mentality when the inevitable recovery picks up steam?

It is this last point that should be the start of the healing process, and the starting point in the negotiation process, because in an ever more complex supply chain, a good contract goes far beyond mere price.

Why? Because to be successful in this new economy, empathy and collaboration need to ride on the same vessel toward the mutual destination of profitability. Collaborating creates value, and executive empathy makes money for both.

To a certain degree, almost everything in business has become data-driven. It’s common practice today that if you can’t measure it, it doesn’t impact the bottom line. Pure data can provide valuable insight, but it doesn’t tell a complete story. The news is filled with businesses that have used numbers — real or manufactured — to justify prices and volumes that are no longer with us.

From my perspective, I’ve noticed some cracks in this data-driven, numbers-only foundation on which our industry used to build and expand profits. Carriers, importers, exporters and freight intermediaries no longer can base their relationships solely on slot commitments, no-roll clauses, general rate increases, “no show fees” and local charges. Vested collaboration, empathy for both partners’ profitability and efficiency is tantamount to long-term success.

We are moving into the “conceptual age” of business, where the right price is not necessarily the lowest price. It’s no longer enough to be a great numbers person. We now expect more of our leaders, and empathy and collaboration are among those qualities.

Understanding the feelings of others is good behavior, but empathy particularly pays off when organizations — that is, the executives who represent companies — understand what their customers and partners are feeling during the decision-making process.

How does empathy and collaboration impact the success of organizations during negotiations? The strongest point to be made is that both qualities involve focusing less on purely statistical internal issues, and more on a collective way to gain mutual benefit. The opposite of collaborative behavior is internally competitive, command-and-control behavior. This is a form of corporate self-absorption that remains from the Enron days of blind selfishness.

It is easy to hide behind pure numbers and cold-hard metrics, but hiding now will only create a one-sided, noncompetitive, zero-sum contract winner — and doom the negotiations to failure in 2010.

Too often, business leaders focus their attention on rate structures during carrier-contract negotiations while ignoring other important facets of a business relationship. Failure to address the entire scope of the relationship can cause a business to fall short when trying to meet certain goals. Empathy and collaboration will bring to light these more subtle issues that should be addressed to create mutual profits. The following are numerous strategies your business should employ to achieve success in contract negotiations for this year and beyond.

1. Pickup Performance.
How can your delivery be on time if your pickup isn’t? Late pickups cost you more money, sometimes at overtime rates. Before agreeing to a contract, you should know your partner’s on-time pickup percentage and how the carrier calculates that measurement on a customer-specific basis. On-time delivery statistics are calculated in a similar way and should be readily available on customer reports — by customer and/or terminal.

2. Invoicing Accuracy.
This important metric is often overlooked but can be the key to saving a company time and money. Companies that invest in an imaging system allowing them to use information directly from a customer’s bill of lading can ensure accuracy while improving invoicing efficiency. If this isn’t one of the measurements you expect to receive from your carrier, it should be.

3. Claims Structure and Response Time.
Getting a shipment to its destination on time doesn’t matter much if it doesn't get there in one piece. How quickly are claims settled? What is the percentage of claims-free service? What is the claims ratio of the terminal that will serve your customers? Partners should make these performance statistics available for individual customers and terminals.

4. Interactive Web Presence.
Examining your partner’s Web site can help you determine the availability of customer service when you need it. Is the Web site interactive in a number of ways to provide the information you need? The site should allow you to enter pickup requests and download imaged documents and customized reports. It also should offer a variety of track-and-trace capabilities, rate quotes, transit times, and terminal information.

5. Solid Communication and Open Dialogue.
Determining how much customers are involved in their partner’s decision-making process indicates the level of interest a company has in delivering quality service. Initiating a good communications program and creating collaboration with customers is essential. The open dialogue will reveal positive and negative qualities of each organization.

6. Responsiveness.
You should be able to talk with experts in each of your partner’s departments when you need them. Is the line of communication open and results-oriented? Maintaining a strong communication link goes hand-in-hand with developing a strong, effective partnership.

7. Customer Service.
A quick and readily available information resource is invaluable to you and your customers. This resource should provide an answer to any question you or your customers might have about transporting or tracing your shipments. The debate can rage about whether the customer service presence should be “in the market” and the costs associated with same, or if a centralized approach is more consistent, and less costly. The mutual goal, however, must be that the core of a long-term, mutually beneficial partnership is excellent customer service.

8. Empathy and Proactive Account Management.
A partner should know when and why a service failure occurred. If it delivers its shipments on time 98 percent of the time, your partner should be able to elaborate and explain what went wrong with the other 2 percent. Organizations should follow up on every service failure, not only to find out what went wrong, but also to initiate corrective action plans to ensure the same problem does not happen again. Taking this stance will make the company a better partner, and, in turn, provide you with better performance. Ask your supply chain organizations how they analyze service defects.

9. Continuous Improvement Mentality and Training.
The kind of training available to your partner’s employees, how often they are trained and the degree to which they are trained should be part of any organization’s strategy in providing superior service to its customers. Asking questions about the training process will give you an indication of the company’s emphasis on quality performance. Does the carrier have an operations training program in place that emphasizes freight handling? Are its drivers trained? Does the carrier offer hazardous materials training to its employees? What about general safety training measures? In addition to these training processes, an organization should have accountability procedures in place at each facility to help reduce costs and waste.

10. Multiyear contracts.

More industries are moving toward multiyear contracts, just as the major third-party logistics providers have over the years via “open book” forecasting, budgeting and costing. A multiyear deal will create an even playing field for each organization to drive out costs (through continuous improvement plans), and increase mutual, long-term profitability. Week-to-week capacity, no rolling, peak-season surcharges, local charges, no-show or dead freight charges become archaic terms of the past, and these tired phrases will become non-issues when looking at the long-term picture of growth, efficiency and profitability.

11. Vested collaboration.
Does your partner organization promote an open, sharing environment or is it merely a transactional workplace? How much does it share with customers via popular social networks such as Twitter and Facebook, or through business-focused networks such as LinkedIn? Creating an atmosphere that has an “open-source” mentality will allow for new ideas to be shared freely and will present an attractive corporate culture to experience. Vested collaboration creates empathy, empathy ensures mutual understanding, and mutual understanding will generate a collective beneficial result.

If you take the time to think critically about these often-ignored aspects of the collaboration process, your company will be equipped with the knowledge and trust it needs to achieve the best possible results far into the future. Consistency, preparation, collaboration and common sense should be your guiding principles when negotiating with your partners.

Successful partner organizations that build mutual empathy and vested collaboration need to establish a committed leadership structure — creating insight, foresight and trust, not just oversight of the annual negotiations. By consistently collaborating on budgets, forecasts and modeling scenarios, with all of the above points taken into consideration, your organization will enjoy long-term fiscal success by being prepared for the best of situations, and to forestall the worst. Empathy will create a collaborative atmosphere during the negotiation phase and will chart a course for a lasting, mutually beneficial business platform into the future.

Michael Stolarczyk is president of Kontane Logistics in Charleston, S.C., and has held various supply chain management roles with Exel and A.P. Moller-Maersk. He can be contacted at michael@kontanelogistics.com.

You can follow him on twitter at http://twitter.com/mjstolarczyk


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Blogger Unknown said...

Companies today are doing their best to survive the market's volatility. Through strategic partnerships, more and more companies in the shipping industry are now gaining momentum because of the increase in production.

Contracts are major determinants in successful partnerships. In most places like Denver, contract attorneys negotiate and represent their clients to legally seal any transaction. Stipulations are checked by contracts lawyer (Denver and other locations) to safeguard the best interest of their client.

Also, I agree that multi-year contracts provide a good backbone for development since it ensures continuity in ventures.

Hope this uptrend would continue and help sustain sub industries. Very insightful analysis. Thanks!

Anonymous Port of Charleston said...

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Anonymous Tufinkgi said...

You are right in proposing not only to relay on the price component. But stimulating the suggested collaborative initiative by innovative pricing concepts is in most cases a good idea. Examples are indexed based pricing, performance based dynamic contract periods etc.

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Blogger Unknown said...

invoicing accuracy should be careof.

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