Suppliers make more money by signing tougher contracts

Immature suppliers smash their standard contract terms and conditions through the bureaucracy of their enterprise customers. But mature suppliers sell more services (and make more money) by signing "real" contracts, and by taking real responsibility for providing great services.

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Photo: Uncle Scrooge McDuck by fanpop

1. Enterprise customers will buy (and pay more for) services backed up by "real" contracts

Mark Cranney from a16z recently wrote If SaaS Products Sell Themselves, Why Do We Need Sales?. Mark argues that:

Some people think the sales force’s job is to communicate value to customers. To these people, sales is about buying a bunch of search ad words or mouthpiecing a company’s message.

They’re wrong.

I couldn't agree more (other than "mouthpiecing" - I don't think that's a word - but anyway). Your supplier sales consultant will tell you that in the new Agile world customers should sign whatever ludicrous terms and conditions are placed in front of them.

That is a fallacy. Large enterprise customers will continue to favour service providers that are willing to sign contracts that provide the customer with robust protections (i.e. are worth the paper that they are written on). As Mark says:

... [E]nterprise/SaaS sales requires a well-developed process and guidelines ... [and] the principles remain the same even though the domains have changed. And whether SaaS entrepreneurs like to admit it or not, the new enterprise customer is a lot like the old enterprise customer.

2. And supplier sales executives can close more deals by challenging their business teams to sign "real" contracts

In order to sell services to enterprises, Mark argues that there are three things that every enterprise customer wants to know:

  1. Why should I do anything?
  2. Why your solution (vs. your competitors’)?
  3. Why now (vs. investing in another area of our business)?

I think that is true, but I have found that a large number of enterprise customers already have satisfying answers to these questions. In my experience, the problem that customers face is that many suppliers now seriously argue that suppliers should take little or no legal responsibility for the services that they provide to enterprise customers.

However, large enterprise customers actually expect that the supplier's services will be provided under terms and conditions that require those suppliers to accept responsibility, in a contract, if their service does not work.

3. Therefore, suppliers that are willing to pay for failure can make more enterprise sales and charge higher margins

Global suppliers make higher margins as they move up the value chain from low risk time and materials services to higher risk fixed price outcome based contracts.

We saw this play out with global technology suppliers during the last 15 years. These suppliers initially made people in lower-wage countries available to customers on a time and material basis. But as more and more players entered this market, the margin that these suppliers charged reduced.

These global technology suppliers soon realised that the only way to maintain high margins was to take more responsibility for customer business outcomes (rather than just providing personnel, charging a daily rate, but taking no responsibility for customer business outcomes). They moved up the value chain.

The same thing is about to happen with externally hosted (i.e. cloud) services. Cloud service providers have moved up the value chain by moving from IaaS to PaaS to SaaS:

cloud value chain

Image: silverlighthack

But cloud providers, for example, are now differentiating themselves along another axis. Enterprise customers will pay more for cloud providers that are willing to take responsibility, and move up the value chain, by signing terms and conditions that require them to take real responsibility for service failures.

4. The supplier choice: accept risk or race to the bottom

Don't get me wrong. Enterprise customers are very cost sensitive, but enterprise customers will usually favour suppliers that provide real contracts, with real service levels. Enterprise customers will favour suppliers that are willing to accept real responsibility if things go wrong.

And enterprise customers will pay for this privilege. Maybe suppliers that sign real contracts won't be swimming in gold coins like Scrooge McDuck. But they won't be locked into a race to the bottom on price with their competitors. And they won't leave millions of dollars on the table to be snapped up by their competitors.


This post originally appeared at iainmclaren.com. These opinions are mine. They are not necessarily those of my employer.