Business outsourcing covers many different product categories that are often considered indirect or overhead business costs. Categories include: stationary, cleaning products, facilities products such as laundry and bathroom and catering products and services.
Over the past 10 years, companies that focus on providing outsourced services have consolidated to create economies of scale in an environment of contracting margins and increased pricing pressure.
Business outsourcing has undergone many changes over the last 10 years. Purchases of outsourced services have been centralised under a procurement function with dedicated category buyers who are able to negotiate aggressively with suppliers.
Procurement teams often compare invoice prices paid TY vs LY to identify savings and demonstrate their function’s value added to their employers. However, invoice value comparisons alone present a limited and incomplete picture of total value.
Procurement managers often end up focused on lower invoice prices but end up driving more operating costs into the companys’ P&L. This occurs because low invoice prices offered by a competitor come with another set of hidden costs.
The hidden cost of poor quality, longer lead times requiring the customer to hold greater levels of inventory, lack of technical expertise and support to solve problems or provide any form of product or service customisation.
In essence, lower prices often create much higher levels of risk, which creates an additional set of hidden costs not measured by procurement and for which they are not held accountable.
Outsourced services and products have been categorised as either a high or low supply chain risk importance and being of high or low impact to profitability. The implication for outsourcing companies is they may have their products or services pushed into a commodity status, and thereby be able to only sell on price with margin contraction the end result.
Companies that focus on product and feature selling end up in the low impact quadrant, are considered as non-critical and become the focus for invoice price only negotiations.
Other significant margin risks come from the increased number of product ranges and complicated inventory and stock movements.
Many companies are now carrying thousands of products and up to 90% of these are considered slow-moving, making up just 10% of the revenues. Outsourcing companies that use cost plus mark-up methodologies severely restrict their ability to improve profitability.
Through detailed analysis of products at a line-item or SKU level and the use of algorithmic pricing models, incremental margin opportunities can be identified.
Using a sophisticated customer value driver model, customer price and contract negotiation strategies can be developed to move the conversation with the customer away from price only or commodity-based discussions to a more sophisticated value based approach to price setting.
Our experience with outsourced products and services ranges from:
stationary, IT, printers and toners, laundry and facilities, cleaning products, hospital supplies, food and beverage, media, logistics and freight.
Areas where we can help your business include:
- Pricing strategy diagnostic
- Algorithmic price optimisation for products and customers
- Pricing strategy workshops
- Customer value driver discovery
- Contract negotiations
- Pricing fundamentals training for your sales force
You may be wanting to develop a strategic pricing capability and move from a cost-plus culture to a sophisticated value based methodology. Pricing Insight can work closely with you at both a strategic and operational level to improve earnings and profitability.