Wednesday, August 28, 2013

Being a sophisticated & credible customer, or how to deal with one that isn't

Some years ago I wrote a post on the pains of (public) procurement in large organisations and governments. It appears this post struck a chord since it continues to receive lots of visitors.

Perhaps because of this, while on holiday I became inspired to write up some more detail on how I think things often go wrong. In passing, this may explain why your government ended up with a 3 billion euro public transport ticketing system that still doesn't work well, or why your city spent half a billion dollars on time tracking software. Both examples are real, by the way.

I've written this post with the most experience on the seller side, and you can read this as advice to ethical sellers and to all buyers. If you are selling stuff and you encounter a hapless buyer, the story below may prevent you from earning a lot of money, but it might save your soul.

For start-ups, knowing if your first customers are credible and sophisticated or not will tell you if they should guide you, or if you should be guiding them.

Sophisticated buyers
When you are a sophisticated buyer, you know what you are buying, and harbor no illusions about the product or what it should cost. As an example, most people I know are sophisticated buyers of beer. You know what it is ('drink with alcohol'), where it is sold, and that to open the bottle, you need an opener, which is typically not included with the crate. Even though the marketing indicates that beer leads to parties, an attractive lifestyle, and it appears, sporting events, you aren't fooled. The bottle contains beer. If you want the attractive lifestyle too, it is your own problem.

Credible buyers
A credible buyer is someone in a position NOT to buy, and can buy somewhere else, and is also able to complain bitterly if the product is not up to scratch. Most people buying beer are credible buyers, as there are loads of places that sell the stuff, prices are well known, and the seller can rightfully fear that the customer will leave forever if he doesn't get a refund on beer that was sold past its date.

Unsophisticated buyers
To stick with beer, we can turn ourselves into unsophisticated buyers simply by scaling up. If we need to arrange for beer for 5000 people on a hot summer day, all of a sudden we don't know what to do. Just buying a 500 crates of beer won't do it, as we'll never get them cold enough in time. We might have heard about kegs, and coolers and whatnot, but we can't just order some stuff and hope that it will work. We'll likely discover we don't have enough cooling capacity, not enough electricity to power the coolers etc, or that the coolers only function after having been left alone for 24 hours. Who knows.

Other typical unsophisticated buyer behaviour includes ordering things that don't exist ("we'd like the 35L Heineken kegs", whereas only the Bud kegs come in that size, and then being massively unhappy), or trying to buy things no one single seller sells.

As an example, when the request for a quote for beer comes in it all of a sudden includes also serving a sizable BBQ dinner. When asked why, the customer says last time round they had the folks supplying the beer vying with the BBQ vendor for power outlets "and this time round we want one single supplier" - despite the fact they are sending the quote to a company that rents out beer supplies!

In short, the unsophisticated buyer needs help, and isn't in a position to second guess the supplier. We'll just have to state our desires ('beer, 5000 people, hot summer day, next week') and hope they show up with the right stuff. Our seller becomes our consultant who tells us what to buy.. from him.

Non-credible buyers
If we are not a credible buyer we are not in a position to negotiate. As an example, let's say we are a large corporation and we've invited 5000 people to the opening of our new building on Friday, and it is now Tuesday. If we approach vendors to supply us with cold beer three days from now, we aren't really in a position to negotiate. We just have to hope we'll not be extorted too badly.

But there are more ways not to be a credible buyer. Particularly governments and large enterprises have a hard time convincing sellers that they actually want to get a good deal, but let me explain.

If you are a buyer in a big place, chances are the product or service you are going to procure will never be used by you personally. In fact, the situation is often so highly specialised that the buyer physically will actually never see the product, and may not even know what it does (or worse, what it is supposed to do).

And in fact, the buyer may have a mission to shave off a few percentage points of costs, by the time the ordering process hits procurement, a budget has already been allocated. So the seller knows the money is sitting there, and he just needs to get it, with the minimal amount of costs involved. And worse, the seller also knows that the buyer personally is worried about other things than price (it is not his own money he is spending!)

Buyers worry about not getting blamed for things, and an effective seller will make sure the buyer personally can feel safe on this front.. and worry less about price.

Another way not to be a credible buyer is when your CEO or minister or whatever has already said that a project will happen, and that it will happen on time, and that he's personally committed to that. That's like a blank check.

An optimum
There is an optimum situation when buyers are sophisticated and credible. Although as a seller you won't be making lots of money, at least everybody knows what is being expected, and knows not to fleece each other. As a start-up, this may be your best initial customer.

An unsophisticated but credible buyer can still get decent service. Since they are able to walk away from a deal, or can credibly switch suppliers, a vendor had better provide them with the goods.. eventually.  For a start-up, an unsophisticated customer can lead you to chase products or services nobody should be wanting.

A sophisticated but non-credible buyer knows what he wants, and will at least know when he is being fleeced. Damage limitation is possible, for example by setting a maximum price. This can be very good for start-ups, as the buyer is willing to take a risk to at least get a product or service.

A pessimum
The unsophisticated, non-credible buyer. Ahhhh. Getting back to the beer example, this is when people are unable to tell apart the marketing ('sport, attractive people, parties') from the product ('water with carbs and alcohol'), and end up thinking they bought the one and getting the other. Or, ordering 100 kegs of beer, and not realizing the need to also order 100 cooling dispensers.

In terms of the timekeeping software example mentioned above, this might consist of ordering the data entry technology and then discovering that no software is included to actually make reports or derive statistics from that data.

Since by this time a buyer can no longer be credible ("we'll get to the bottom of this and deploy before the end of the year!"), even if he was in the first place, we've now reached the pessimum: the buyer doesn't know what he should be buying, and can't negotiate about it.

So, now even more software has to be brought in, against ridiculous prices. The timekeeping example is from New York City, read all about it here.

Further exacerbating the situation is that almost nobody would describe themselves as an unsophisticated non-credible buyer, and instead pretends to know what they are talking about, and are mean negotiators - making it even more likely that costs & and problems will explode!

Buyers often attempt to cover over their lack of credibility and sophistication with massive amounts of legalese. This rarely works. It is typical for example for a buyer to write giant lists of specifications, like "must be able to serve beer to 5000 people", but this will still not save you if you neglected to specify that they would train your people ('how hard can it be?') or would supply servers.

Also, threats of lawsuits do not save your event this Friday!

How to solve this
Becoming a "credible buyer" is very tricky if your organisation isn't like that. Even if you try to get three potential suppliers for your megaproject, for which the ministry has already allocated and published a budget, all three of them will attempt to exhaust your entire supply of money. There are also tricks like awarding a deal not to the cheapest bidder but to the second cheapest, which sets up game theory in your favour. But it is hard to do. Within a large government typically only people who can change or set budgets can be credible buyers.

Becoming a sophisticated buyer is easier however, but it has to start with the realization you aren't one yet. That may in fact even be the biggest step. And don't feel bad about it, most organisations rarely buy new buildings or mega IT projects - while sellers sell such things all the time. It is very normal not to be sophisticated about things you don't do that often!

It is tempting to hire consultants or an integrator to help you buy your project, but this puts a great strain on the integrity and quality of your partner, as you will be relying on them completely again. Are you a sophisticated & credible buyer of procurement services?

A better way is to invest in your own staff and make sure you gain sufficient understanding that your own people can become "sophisticated buyers". This requires time and money, but it will pay itself back a thousand times over. Easily.

Another good thing to realize is that the experts might already be working for you, but that you actually need to involve them.

Rounding up
Successful transactions are very common with sophisticated, credible buyers. Complete and utter failures with giant cost overruns are common for unsophisticated, non-credible buyers.

Don't try to buy stuff you don't have experience buying.  Get people working for you that have that knowledge and experience. And listen to them - they might be working for you already.

Try not to buy stuff unless the seller knows you are at liberty not to buy or buy somewhere else.  Make sure that the actual people involved in buying things are not so separated from the issue that their own job assurance is more important then actually getting a good deal.