Strategies to Help Vendors Optimize Their Long-term Global Contracts

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1 THE INDUSTRIAL PERSPECTIVE Strategies to Help Vendors Optimize Their Long-term Global Contracts May 2010 KPMG INTERNATIONAL HAVE YOU CONSIDERED ALL THE ISSUES? The following questions may help vendors to identify potential gaps in their approach to long-term contracts: In gaining new business, have I conducted due diligence on whether it will be deliverable and profitable? Do I have true transparency in my costs to deliver this service/solution? Are contracts structured to achieve my revenue and profitability goals? Have I fully reviewed both upside and downside risks at each stage of the lifecycle? Am I launching business improvement programs in a controlled, strategic manner? Have I developed delivery models, deal structures and methodologies that can be applied to future businesses? In today s cost-sensitive business environment, global diversified industrials businesses are leveraging external vendors to bring added value to their customers and as a means of cutting cost out of their business operations. To be successful, vendors providing services and solutions for these companies should take a thoughtful approach to long-term contracts. Critical success factors include the following: Striking a balance between competitive pricing and sustainable margins Taking an informed approach to the contract development process Incorporating contract governance processes from the very beginning Building key control points into the contract lifecycle, where progress can be measured against goals Establishing a risk-mitigation strategy around operational issues, missed deadlines or financial overruns. With the right strategies, effective ways to optimize performance can be found at almost every stage of the contract lifecycle not just during the initial negotiations.

2 2 Strategies to Help Vendors Optimize Their Long-term Global Contracts Lifecycle of the Long-term Global Contract Long-term contracts are ultimately only beneficial for the vendor if contractual promises can be delivered profitably. Highly competitive bidding cycles drive contractual positions that leave the delivery side of the business facing tough customer and financial challenges from day one. This needn t be the case however. With upfront planning and the establishment of key control points within the end-to-end business cycle of selling and delivering contracts, both vendors and their customers can benefit from valued services being delivered on time and on budget. Alex Phelps Senior Manager Performance and Technology KPMG in the U.K. Lead generation and market propositions Know your market and clients Transparency Align core/non-core services Develop propositions Control Point Business Assurance Managed services Pipeline Control Point Sales Operations Control Point Governance and leadership Transformation Governance Steady state Deal delivery Generate and manage opportunity pipeline Source: KPMG International 2010 The success of long-term contracts depends on the quality of the end-to-end business processes and its key stabilisation points Today s economy makes long-term vendor contracts more attractive than ever to many Diversified Industrials. Global vendors provide complex services, systems and technology solutions designed to help these companies enhance their customer offerings, reduce costs, streamline operations, increase revenues and enter new markets. For vendors working with Diversified Industrials, the potential benefits are equally clear. Global contracts can extend up to 10 years, offering a guaranteed revenue stream for the longer term. However, the actual Transformation/ build Sales and bid approval process Design, bid and win opportunities Control Point Bid Management Mobilise transition Transition profitability of the contract for the vendor depends on the judicious management of end-to-end business processes. Finding the balance between a low price to secure the business and sufficient margins to realize a profit depends on the integration of key control points and careful governance from the outset. Equally important, the vendor must work toward a sustainable balance between profitability and customer satisfaction to ensure the ongoing strength of the business relationship and create the possibility of new contractual agreements in the future.

3 Strategies to Help Vendors Optimize Their Long-term Global Contracts 3 Support a Lifecycle-based Strategy from the Outset To support the overall success of a global longterm contract, vendors should develop a strategic approach across the contract lifecycle that includes the following: A comprehensive business process integrating lead generation and value propositions, sales and bid approval, and deal delivery Key stabilization or control points at which performance can be gauged, issues addressed and activities improved Appropriate levels of governance for effective business transition and transformation. Many long-term contracts do not achieve profitability during the early stages of deal delivery, when the investment is highest. Therefore, risks and rewards should be calculated as accurately as possible across the contract lifecycle, before prospects have been targeted and certainly before a contract has been agreed. Economic pressures and the highly competitive nature of global vendor markets can sometimes encourage a win at all costs mentality to bidding opportunities that might be detrimental to a vendor s business in the longer term. However, a well-planned, strategic approach can lay the foundation for success and profitability.

4 4 Strategies to Help Vendors Optimize Their Long-term Global Contracts Link Strategic Propositions to Lead Generation In targeting prospects and offering new bids, vendors can sometimes underestimate costs or the resources required to satisfy service level agreements (SLAs) and other contractual obligations. In fact, what a vendor needs is not simply new business, but the right business. This means establishing a leadgeneration and marketing process that is focused on identifying and reaching the right customers, propositions and channels in terms of the vendor s revenue needs, capabilities and resources. Business intelligence including a deep understanding of markets, prospects and current clients is a key factor in this process. The vendor should also carefully assess its go-to-market readiness and conduct maturity and capability reviews that include detailed gap analyses. Developing a business case to support lead generation can help the vendor determine which prospects are the appropriate ones to pursue. This is also the stage when the vendor can determine the alignment of its core and non-core services. This involves decisions to build, buy or partner with other service providers to meet their clients needs, as well as the development of an overall sourcing strategy and key supplier agreements. These initial efforts properly developed and implemented can help support business assurance across the contract lifecycle. Business assurance can also be supported by investment boards that prioritize expenditures, long-range scenario planning for portfolio changes, and the ongoing refinement of the mega-deal business model.

5 Strategies to Help Vendors Optimize Their Long-term Global Contracts 5 Sell, Bid and Design Contracts Using a Portfolio Management View The next stage sales, bidding and contract design allows the vendor to qualify the right prospects and sell the right deals. Using a portfolio management view, the vendor generates and manages an opportunity pipeline based on a risk/reward profile. At the same time, a formalized bid and approval process is developed that includes specific design rules and mid-point reviews based on key deal drivers. The aim is to ensure that the right functions and resource levels are represented at the bid stage. Due diligence is required to help validate the overall assumptions and specific terms of the bid. The vendor translates the bid into operational baselines, separating the work into work packages, with costs attached to each package. The development of more granular work packages can sharpen the accuracy of the bid and bring an added level of clarity to complex bid negotiation processes. Risks, both upside and downside, should be carefully considered at this point. Costs of delivery can be affected by inflation, changing exchange rates or unforeseen economic developments. A risk premium is common for long-term contracts that depend on new technology or processes that have not yet been fully proven in the field. In addition, vendors can face business, regulatory and legal risks that involve suppliers and third parties, especially in supply chains that extend across multiple regions. These risks and others can be addressed in the contract design stage by establishing a risk register that identifies key risk areas linked to specific delivery terms and costs for analysis by the prospective client. Working with the vendor, the client can then develop a contract review governance model that incorporates sales, operational, technical and financial factors. This governance model also extends into the subsequent delivery of the deal, including a clearly defined stagegate process.

6 6 Strategies to Help Vendors Optimize Their Long-term Global Contracts Support Deal Delivery with Effective Mobilization and Process Management Proper deal delivery depends on a high level of contract performance transparency. Account startup and deal management teams should track key indicators such as earnings milestones as well as progress against cost reduction and revenue maximization goals. If revenues fall below projected levels, mitigating measures should be immediately considered to help address the issue. Deal delivery can also be supported by establishing centers of excellence for resource management, delivery platforms and capacity management processes. These centers can make use of financial trading models that support consistent accountability metrics and the transparency of inter-firm trading and profits. The success of deal delivery depends on the proper management of resources involved at every stage of operation. This includes personal incentive plans and key resource up-skilling to improve the performance and productivity of staff members and managers involved in the deal.

7 Strategies to Help Vendors Optimize Their Long-term Global Contracts 7 Focus on the Integrated Management of Control Points Lifecycle control points help enable ongoing measurement against key contract milestones and also support performance improvement opportunities that can benefit both the vendors and their clients. A good example of how control points work to improve contract performance for all parties is the Transformation Governance Control Point at the center of the KPMG s contract lifecycle model (page 2). Diversified Industrials usually have a large number of project and business improvement initiatives in play simultaneously. Each one is designed to deliver significant benefits to the company, but if they are not properly aligned, these initiatives can end up competing for the same resources and generating conflicts within the company. At times, changes to one initiative can limit the benefits of another. In this case, a third-party advisor can work with both the vendor and the multinational to integrate these initiatives under a single improvement portfolio. A transformation team can review key timing and resource allocation decisions, along with relevant limiting factors. Based on a realistic assessment of capabilities, an integrated plan can be developed with project stakeholders to help ensure that initiatives can proceed in a controlled and well coordinated manner. Control points are a critical component in establishing an integrated plan and should be adapted and refined to help support the overall success of each contract. Their importance only increases with the length, scope and complexity of a vendor s contract lifecycle.

8 kpmg.com How KPMG can help This KPMG Industrial Perspective provides only a brief outline of the potential opportunities to improve the performance of global long-term contracts. KPMG member firms can help vendors capture opportunities based on their unique contractual requirements. For example, KPMG specialists can develop risk registers for specific vendor contracts that identify potential risks involving delivery costs, project timelines, tax liabilities, compliance issues and other key factors. We can also introduce tested methodologies designed to help mitigate these risks while improving processes, enhancing performance, lowering costs and increasing revenues. For more information, contact your local KPMG representative or visit Contact Global Diversified Industrials Leadership: Jeff Dobbs Global Head of Diversified Industrials KPMG in the U.S. jdobbs@kpmg.com Mark Barrus Global Head of Metals KPMG in the U.S. mbarrus@kpmg.com Marty Phillips Global Head of Aerospace and Defense KPMG in the U.S. mwphillips@kpmg.com Gerald Fox Partner Performance and Technology KPMG in the U.K. Tel: gerald.fox@kpmg.co.uk Alex Phelps Senior Manager Performance and Technology KPMG in the U.K. Tel: alexander.phelps@kpmg.co.uk Graham Smith Global Head of Engineering and Industrial Products KPMG in the U.K. graham.smith@kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. Designed by Evalueserve Publication name: Strategies to Help Vendors Optimize Their Long-term Global Contracts Publication number: Publication date: May 2010