F I R S T Q UA RT E R 2 0 05
Attacking Health-Care Costs Head On
The rapid rise in health-care costs isn’t a human resources problem, it’s a business
problem. It’s time to treat it that way.
Meeting Your Growth Goals in Challenging Times
Great growth strategies and skillful execution can carry businesses through the
toughest of times. Leaders in retail banking and telecommunications show how.
Spending Smarter: Rebalancing the IT Budget
Businesses that rein in spending can save 15 to 45 percent — paving the way for
more strategic IT investments.
executive
agenda
ideas and insights for business leaders
management agenda
36
Winning Big Deals—Profitably
Multimillion-dollar contracts, priced right, can help companies supersize their top lines.
But how do companies win deals of that size and complexity? And how do they price
them? More strategic approaches to selling and pricing are at the heart of the answer.
43
Bootstrapping an Economic Recovery
São Paulo. Chicago. North Carolina. Ireland. Governments around the globe, facing
intractable issues from soaring crime to languishing businesses, have found that raising
taxes is not a winning strategy. Enlisting the right partners is smarter and key to a
fundamental transformation.
47
A New Business Plan for Chicago Public Schools
vertical
view
When Chicago’s public school system needed an overhaul, it turned to some privatesector lessons. The vision: a vibrant mixed-income neighborhood in which schools are
an anchor in the community, providing activities and services that benefit everyone.
52
Banking on China
If you’re in the financial services industry and considering China, now is the time to
make the move. The number of “bankable” households is on the rise. And the risks,
while still sizable, pale in comparison to the potential rewards.
56
Finding Opportunity in a Post-Textile-Quota World
With an end to textile and apparel quotas, the endgame of barrier-free trade is only
a matter of time. Already, some retailers are turning what could be considerable
upheaval into opportunity.
Management Agenda
Winning Big Deals—Profitably
Today’s aggressive, sophisticated buyers make detailed comparisons of prices
and specifications. Often there’s little room for loyalty, relationships and even
trust. But when it comes to crafting multimillion-dollar contracts, sellers that
combine strategic selling and pricing approaches can win more business and
bolster their margins.
I
t has been said that a business grows its top
line one customer at a time. But when a sale
is worth hundreds of millions, or even billions
of dollars, the growth potential takes on new
dimensions. Think of recent examples such as
Dell, which will provide hardware and managed desktop services to Dutch electronics giant
Philips Electronics in a US$700 million deal
involving 60 countries and 75,000 employees.
Even (relatively) smaller multimillion-dollar
deals involve multiple moving parts and hardto-quantify benefits.
How do companies win deals of that size
and complexity? And how do they price them?
Management Agenda
FIGURE 1
Key characteristics and audiences for various sales strategies
Consultative selling
Selling a business opportunity and business case to top management
based on superior customer (and end-user) insight
CEOs
and CXOs
Solutions selling
Selling an end-to-end technical solution, often including
services, to the head of a technical unit, based on unique
technical solutions characteristics
Head of
technical unit
Product selling
Selling a product to technical buyers based on
product superiority
Technical buyers
Source: A.T. Kearney
Organizations that can answer these critical questions are well positioned to accelerate top-line
growth. Our experience in helping clients close
deals valued as high as US$1.3 billion reveals
that strategic, or consultative, selling together
with advanced pricing approaches can help the
seller significantly improve conversion ratios and
win rates of large contracts, while earning on
average 5 percent additional gross margin.
Regardless of sector, high-value solutions
and services involve large sums of money and
significant technical performance and timing
risks. Because they affect the buyer’s business performance, they require cross-functional involvement and multiple decision influencers. And the
business benefits and risks are ambiguous.
As a result, while large deals remain highly
data driven, the focus changes. Benefits aren’t
measured in near-term cost savings but in
longer term, broader measures that span 10 or
more years. Business cases that look far into the
future are difficult for the seller to create— and
equally difficult for the buyer to evaluate. Trust,
experience and a strong strategic capability
must move to the forefront of the selling process, since the buyers must have confidence in
the seller’s projections and want to collaborate
to refine the business case.
Strategic selling and pricing approaches
aren’t just for large deals. By packaging elements
of these approaches, companies can train their
sales professionals to adapt these concepts to
smaller deals as well.
Consultative Selling
The most successful sellers don’t focus on specific product attributes or even solution superiority. Rather, they present a solid business case
and compelling opportunity (see figure 1).
Because the focus is on solving significant
business issues, the consultative seller wins
favor by presenting a convincing business case
and truly differentiating its offering from the
competition’s. The value proposition typically
includes a significant amount of partnering,
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EXECUTIVE AGENDA
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Management Agenda
and for equipment suppliers, a large services
component.
The process runs through three major
phases:
Create a shadow strategy for the buyer.
The seller assesses the buyer’s strategic objectives, obstacles to achieving them and potential
solutions. The seller also assesses developments
in the buyer’s industry and markets as well
as the opportunities and threats the buyer is
facing. For example, one supplier thoroughly
researched its potential customer’s situation
THE MOST SUCCESSFUL
SELLERS don’t focus on spec-
ific product attributes or even
solution superiority—they
present A SOLID BUSINESS
CASE AND COMPELLING
OPPORTUNIT Y to the buyer.
and showed the buyer it could never achieve
its overall revenue objective without addressing the small- to medium-sized enterprise
(SME) market. The seller gained the buyer’s
trust and offered to assist in executing the
SME strategy.
Propose highly targeted, customer-driven
value propositions. A successful seller will help
the buyer capitalize on opportunities or mitigate specific, quantified threats. Propositions
typically cover both the seller’s solutions and
38
WINNING BIG DEALS — PROFITABLY
services and those of external partners. One
seller crafted its value proposition to address
the buyer’s key issue: redundancy payments to
surplus personnel. The seller suggested forming an enterprise utility to deliver a broad set
of services and recommended a partner to assist
with the implementation. This solution could
significantly reduce redundancy payments, and
thus help fund the buyer’s technology investment and maximize the benefits gained.
Secure buy-in for an attractive business
case. Starting with specific, common assumptions, the seller begins a series of interactions with the buyer to lay out
the business case. One organization,
for example, provided comprehensive
10-year financial models on how the
buyer’s revenue, operational costs and
investments would develop under two
scenarios. The first scenario modeled
the seller’s recommended technology
migration strategy, while the second
mapped out a realistic competitive
migration scenario. The seller’s recommended scenario offered about US$4
billion more in net present value —
and beat out its rival.
The two- to three-month consultative selling process makes it difficult
for competitors that arrive late to the
table to match carefully tailored value
propositions. Additionally, it usually uncovers
key opportunities to obtain new contracts and
bring in additional revenue.
Calculating Costs and Benefits
A consultative approach arms the seller with the
facts that make it possible to clearly articulate
the total benefit of ownership for the buyer.
The seller can then seek a reasonable stake,
typically about 10 to 30 percent of the value
Management Agenda
FIGURE 2
Components of a pricing strategy for business-to-business industrial sales
Cost-based
pricing
Forward product pricing
• Understand effects of
product cost and volume,
and price elasticity
• Price accordingly to
ensure penetration and
volume sales
• Include in opening phases
of product life cycle
Forward contract pricing
• Understand contract lifecycle and when margins
are brought in
• Price accordingly: be
competitive in initial
phases
Market contribution and
sales force incentives
• Manage contribution by
deal type
• Set incentives to reflect
profitability
• Counteract gravitation
toward cost-based pricing
Market-based
pricing
Entry-level product with
options
• Adjust product functionality to be price competitive
• Counteract e-procurement
and similar tools
• Add functionality as needed
Selling on installed base
• Provide functionality
options to upgrade entrylevel products
• Include upgrades for addon sales on installed base
• Price closer to value
Price premium target setting
• Set price premium target
(if TCO allows) to counteract gravitation towards
cost-plus pricing
created compared with the next-best competitor’s offer. Clearly, detailed competitive intelligence is highly beneficial.
Companies that take this approach don’t
look at the situation from the inside out, but
focus on the customer’s business and work
backwards. What does the customer need to
achieve long-term advantage? The answer typically reaches beyond what any single supplier
can offer, making the ability to build in partner
propositions essential. This knowledge enables
the supplier to focus on what matters to the
Enhanced
solutions pricing
Value-based
pricing
TCO/TBO pricing
• Quantify customer benefits
and costs
• Set price in relation to
value of competing
solutions
• Communicate advantages
Value-based packaging
• Group functionality into
packages to communicate
value
• Bring price point closer to
value for customer
Joint-process and product
improvements
• Integrate customer’s and
supplier’s processes
• Share joint benefits
through pricing
Gain sharing
• Make part of payment
contingent on realized
benefits
• Share risks and rewards
Outsourced migration
• Operate equipment
• Ensure economies of scale
and scope
• Price in accordance with
defined customer outcomes
“On tap” sales
• Sell “power by the hour”
rather than equipment
• Capture TCO benefits and
compete on price
Source: A.T. Kearney
sophisticated buyer: total cost of ownership
(TCO) and total benefit of ownership (TBO).
Pricing Right: Value Is Key
The dialogue established during the consultative selling process not only improves win rates,
but also reveals what the buyer truly needs,
enabling the use of advanced pricing models
based on value. Sellers can begin with more
advanced pricing approaches and work to
simpler ones if necessary. The most advanced
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Management Agenda
Companies that take A CONSULTATIVE SELLING
APPROACH don’t look at the situation from the inside
out, BUT FOCUS ON THE CUSTOMER ’S BUSINESS
AND WORK BACK WARDS .
pricing, based on a detailed business case for
total benefit of ownership, requires new competencies and systems support.
If the seller has a strong TCO/TBO advantage, it might suggest that the buyer specify
TCO/TBO criteria in its requests for proposal
(RFP). A solution might offer a range of benefits, such as increased productivity or the opportunity to move into a global market. What are
the total operating expenditures the solution
would require? In one case, we found that our
client could ask for a price premium of 50 to
100 percent, depending on its competitor’s
proposal, while still being cost neutral for the
total investment in the network and operations
expenses over the first five years.
Another possibility for the seller is to suggest gain-sharing models in the RFP process,
which will complicate product-to-product comparisons, but help bridge the gap between
buyer and seller if expectations are asymmetric.
A seller can also try to focus on providing services rather than equipment via models such as
“power by the hour” or outsourcing. Selling
“power by the hour” allows the seller to capture
and keep the TCO advantage if the price is set
in line with competitors’ (rational) prices. In
addition, the total sales value can increase
dramatically; in one case, we found the revenue
was five times greater.
40
WINNING BIG DEALS — PROFITABLY
The most appropriate pricing and deal
structuring models vary by industry. We created
a “ladder” structure for a set of industrial sellers
(see figure 2 on page 39). Under this structure, the
models with the least margin opportunity are to
the left; those with the most margin opportunity are to the right. The seller can begin the
process with an enhanced pricing solution and
value-based pricing, and if necessary, move to
the less attractive models. The earlier the seller
engages with the buyer in a consultative selling dialogue, the greater the chance that it can
influence the process and use of pricing models
in its favor (see figure 3).
Enhanced solution pricing can be up to 20
to 30 percent higher than cost-plus pricing for
a seller with significant TCO advantages. But
since it’s likely that deals will be distributed
across the pricing ladder, total gross margin
improvements are typically closer to 5 percent.
From Principles to Practice
Companies that really know their customers — down to their strategies for thriving in
the future — are well positioned to enhance
share of wallet even in tough times. Consider,
for instance, the plight of a major equipment
supplier to a European national telecommunications operator. Facing shareholder demands
Management Agenda
FIGURE 3
The sales approach determines which pricing strategies and price levels can be reached
(e-)
procurement
(RFP)
Technical
specification
Customer’s
buying process
Concept
development
Vendor sales
approach
Consultative selling (shadow strategy, value proposition and business case)
Business case
Implementation
Consultative selling (value proposition and business case)
Solution and product selling
Responding to
RFPs and auctions
Vendor’s
pricing
opportunity
Price
ceiling
Enhanced solutions
pricing
Value-based pricing
Market-based pricing
Source: A.T. Kearney
to increase profitability without jeopardizing
long-term service levels and viability, the buyer
decided to reduce capital expenditures by 40
percent. The supplier, with about 30 percent
share of wallet, was told its sales to the operator
would drop by 40 percent immediately.
The supplier sought ways to deflect the
impact of the new requirements onto other
suppliers while retaining or increasing its sales
levels. The supplier and A.T. Kearney analyzed
the shareholder demands and estimated more
specifically what the shareholders likely wanted
in terms of revenue increases and cost reductions, uncovering specific obstacles preventing
the operator from getting there. The accuracy
of the initial analysis helped build the operator’s
trust that the project would yield sufficient value
to justify involving senior managers, and to some
extent confidential information, with the team.
Price
floor
Cost-based pricing
The supplier suggested alternative ways for
the operator to reduce operating expenditures
and raise revenues, offering sufficient specifics
to gain backing from sales and marketing. With
each stage, new senior managers were coaxed
on board, attracted by suggestions as to how
they could significantly contribute to the objective. The project covered areas ranging from
shared services and insourcing to new services
and revenue assurance. It resulted in revenueenhancement and cost-reduction plans substantially beyond reducing capital expenditures—
and beyond the operator’s original aspirations.
The team also formulated several value
propositions to help the operator overcome the
barriers to its goal, and it included partners to
provide the operator with a full solution.
The project ultimately enabled the operator to beat its revenue and cost targets while
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Management Agenda
preventing deterioration of its network and
even to begin preparing for its inevitable move
to an end-to-end next-generation network.
The supplier doubled its share of wallet to
approximately 60 percent and enjoys a strong
relationship with this operator.
Ensuring a Mutual Win
Closing large contracts profitably has never been
easy, and with the increasing focus on upgrading procurement capabilities among buyers
over the world, it will likely remain a challenge.
But given the key role top-line growth plays
in building shareholder value, closing contracts effectively is crucial. If executives make
investing in the development of these key sales
capabilities a top priority, they will be favorably
positioned as selling becomes more strategic.
When the seller moves substantially closer to
the highest attainable price, while still providing the best proposition for the buyer, both
sides win. Now that’s a big deal.
Consulting Author
THOMAS KRATZERT is a vice president in A.T. Kearney’s communications and media practice. He can be
reached at [email protected].
The author wishes to thank A.T. Kearney consultants Michael Broquist and Håkon Tanem and associated
consultant Frank Robert for their invaluable assistance in preparing this article.
42
WINNING BIG DEALS — PROFITABLY
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agenda
ideas and insights for business leaders
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