Distributor’s tips for principle choosing

Or what to understand before you place your signature on the contract.

Assuming you have mapped out logical product categories to choose from... here is what I would check:

Financials

Profit, ROIC, ... : Gross profit percentage point (pp) and gross profit nominal amount – it’s fair to mention that both aspects are important - pp and nominal amount. You can have a huge pp (%), but the actual amount can be too small, which most probably would not provide sufficient return. Why? Because the operational work that needs to be done for each product is remarkably similar, regardless of the value of the sales. That would mean that your work is similar for product which accounts for 100k and 1M of sales. Even better measure is ROIC, which stands for Return On Invested Capital, but taking into account nominal amount of profit as well.

Unused capacities

Every company has resources which are not fully utilized (or correctly utilized), so „taking these resources to work” is going to bring savings to existing business, which means additional/marginal benefit with adding more work. Putting it in simple words one should do so called „marginal analysis“ where additional effects of gross profit would compare with additional costs. It’s important to be extra careful when business decisions are made this way, as it is questionable if the „unused resources“ are properly calculated for decision makers (or by decision makers). Motives/rational for the decisions should be also understood, but this would be a completely different topic.

Watch out! – startup/exit costs... Opportunity for better result brings exaggeration, but this feeling should not prevent you to investigate potential risk of starting business with a new company. 1st advice – ask yourself „are there startup costs which are happening before the sales and gross profit numbers start to pour in?“ and „if so, are these costs included in overall profitability analysis?“ In simple terms, it could happen that more work means more working hours, more employees, which means cost of recruitment and fact that new employees will not start work probably on the same day as the new business kicks in, which would add additional costs, so called „dry run“ 2nd advice – „what happens if business fails, what are the costs of existing?“ For example, in case the business fails, does it mean employee reduction, and who pays for redundance? Is this stipulated in the contract or not, if not, why, and how this could be managed? 3rd advice – how does this new business look from the „corner“ of your existing partners? Is the „co-habitation“ possible under one roof and under which conditions? Are there any signed contracts which limit your decisions? 4th advice – how does this business look from your peers’/competitors’ and customers’ viewpoint? Will this new business trigger reaction of competitors which would try to take away some of the existing business? How will customers see your growth and increase of market share? Ask yourself these questions not to fall short from decision to take new business, but to be ready for every eventuality.

Long Term co-operation

If you are not familiar with the CLV (Customer Lifetime Value) concept, I suggest you check this one out. So, during negotiations with either new customer or supplier, it would be worthwhile to do a simple CLV analysis, which shows net collaboration value with the new partner taking into consideration future cooperation. Of course, you don’t have to be this sophisticated if you don’t have resources, you can do a simple 5 year plan, understanding that in the course of preparing it you made certain assumptions for calculation. But, even this is better than not doing nothing.

*Customer Lifetime Value= (Customer Value * Average Customer Lifespan)

where Customer Value = Average Purchase Value * Average Number of Purchases

Bigger „pie“

For example: You work for Distributor with regional presence? What is better than agreeing a job for one market? Of course, agreeing for several markets! Having that in mind, it’s good to access opportunities for cooperation which are sitting beyond the negotiation table. Broader cooperation for sure creates additional synergies in terms of revenue, costs, experiences and knowledge, broader network between two organizations and a closer collaboration/higher interdependence... all in all a „bigger pie“.

Market share

Why do we have „market share“ in this list? Basic reason – market share is in direct correlation with the negotiation power. With whom? With both suppliers and customers. Higher number of employees will give you for example better conditions of employee insurance/insurance companies. Higher market share will guarantee better negotiation position with the customers – imagine a situation where you account for 15% of total turnover of a customer. Will this customer easily decide to cancel cooperation – no – but the key word in the previous sentence is „easily“ – if your business practice is not appealing to customer needs, chance to cooperate in a limited scale would be disproportionally higher. Here I want to point out a watch out which is related to practice of utilizing dominant position in the market – this practice I highly discourage.

Similarities between business philosophies

This criterion is often neglected during deal negotiations, but overall significant, as lack of business philosophy-strategy complementation, in time can be a breeding ground for potential conflicts, which again leads to loss of focus, energy, resources for both companies. It’s normal that business practice/philosophies are different between different companies, but one needs to be aware of these differences, so that the doings of these different philosophies would not effect the final outcome of cooperation. 1st example – supplier is always in a „challenging“ mode, changes business model according to his interest, and customer/distributors want stability in business decisions, predictability and are not prone to changes. 2nd example– supplier is not prone to business model change, focused on market share, and customer/distributor focus is achieving short term financial objectives. Both of mentioned examples will for sure lead in future to potential conflict situations, so in order to avoid this one, initial deal should include assumptions which would minimize the risks of latter differences in approach. Of course there is a vast number of solutions, and there are significantly different ones for both negotiation sides.

Energy needed for collaboration

Hand in hand with business philosophy fit, level of energy that is invested in the business is quite important. This part if in direct correlation with organization scheme fit, on several basis: 1) number of layers in organizational scheme 2) name of positions 3) organizational/position accountability and responsibility 4) people. Why does everything listed effect the energy needed? Example: your organization has 10 organization layers, and your partner organization has 5. Both organizations have a position they call CEO, but within your organization it’s more of a political position with focus on strategy without the real levers of operational decisions, while the CEO within partner organization is more operational, has more responsibilities and it’s more accountable, making decision faster. The Peer of CEO position in partner organization in this case is counterpartying probably to your Sales Manager/Director position. But the problem is that CEO in partner organization sees a CEO in your organization as peer – and this situation would lead your organization to spend hours preparing your CEO for the meeting with his counterpart, if such communication is not moved to a right organization part within your scheme. Additional question is „who is sitting on the opposite side of table?“ – and by saying who, I mean what kind of skill set he/she has, what kind of life and business experience, what kind of person. Similar people will find more easily common grounds , and will more easily build trust and rapport. So now, after all being said, what are the recommendations: 1st – clearly create expectations – it’s ok to have different views, but you need to list them out and outline them. 2nd – organization and human „mirroring“. Wherever possible find counterparts which will build their trust fast (but not at the expense of business interest!) 3rd – if you don’t have other solutions, place a Single Point Of Contact (SPOC), who will coordinate everything within your organization vs partner (which is especially important if there is a multifunctional collaboration)

Be aware of big ego’s

In connection with the point above, but such a big driver of decisions, that it should be treated as a separate point. Here you need to firstly understand that company and personal interest can be completely same, but also different to a point, or completely different (both sides of negotiation table! Don’t think that these things do not exist within your organization). Easily said, but a lot of unclarities... I would start by saying, how someone leaves the „negotiation table“, and how he/she thinks will be perceived can significantly influence the current and all future negotiations. What I would advice here? 1st – „we agree that we don’t agree“, „better to have a good divorce vs lousy marriage“, when you sit at a negotiation table, you need to have a worked out a version where you don’t strike a deal. This sense will give you confidence at the table, and will bring you in some cases better results. 2nd – try to create additional value at the table, this additional value will create higher chance that everybody will leave the table in a positive mood (but never abandon „red lines“ you created before the sit down) 3rd – listen and understand.

Hungry for success

Ask yourself is your organization ready to integrate, not in terms of P&L, Balance Sheet, operations, process..., but is your organization hungry for success? Even if your organization has all prerogatives to strike a deal, if your organization is not motivated for additional business opportunity, park the new deal, until you fix your biggest problem within.

(extract from the book Negotiation v.0 by Stevan Popevic)