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How can SME vendors survive the cost-cutting and remain relevant during the downturn?

During this economic downturn, corporations across the world are looking at cost-cutting as an important tool to tide over the financial crisis. Afterall money saved is money earned!

Larger corporations are engaging external consultants to conduct “Spend Analysis”. Consultants would analyse huge data to create a dispassionate view on the relevance of the costs being incurred across departments. The process comprises interviewing internal employees of the corporation, prioritizing the costs, and identifying respective vendors or suppliers. Corporations would then create a Negotiation Matrix ranking the vendors based on parameters like criticality, reliability, speed of delivery, and compliance. The key negotiation drivers are Cost, Quality, and Value which may sometimes favour larger vendors, but smaller (SME/MSME) vendors are often found at the lower end of the BATNA (Best Alternative to a Negotiated Agreement).

To be considered a critical vendor may not be something within your control. The corporation has a goal of negotiating down the costs or choosing another vendor who is willing to offer the targeted price. Remaining calm, listening intently, working on developing the relationship, and gradually offering non-financial benefits vis-à-vis a price cut may be the way to go.

Relationship management plays an overarching role in influencing any decisions. Create higher engagement with the department executives who experience your services directly. Normally, your routine engagement (service call or PR ) with the customer needs to be stepped up at this stage. The meeting over a fancy dinner or drink may be substituted by an offer of useful personal service, within the permissible boundaries of the Gift Policy of the company. Turn a purely commercial transaction into a strategic partnership.

Corporations often resort to creating competition and intensity among vendors to reduce costs. A long-standing vendor is known to be trusted and reliable, but can you rest on your laurels or be complacent? You would like to secure the gate at this hour, as many opportunists are knocking at the doors of your principal. Sometimes, resorting to a ‘loss leader pricing model’- a tactic to offer certain products/services at a huge discount or loss to woo customers from the competition. This is the time where you would up the ante through the delivery of superior quality work. You may even decide to spoil your customers, not thinking that you are doing more than necessary!

Communication is the key. You may rather over-communicate than under-communicate at this hour. You may decide to engage more with the customer digitally. Be open to a discussion empathising with their pains. Changing an existing contract is not easy for the company as well. The company needs to go through a rigorous process for the change. So, extend your arms and legs for collaboration, ask how you can make their life easier!

Companies are also coming up with inhouse solutions to reduce costs. For example, the corporate tenants are offering a profit-sharing model as an alternative to fixed rental. If you are a landlord and the rental has been a significant portion of your overall income, acquire a fair amount of information on the business of the tenant and read into the fine prints before you accept any such offer. Base your considerations on; what is the current market for lease? what is your opportunity cost if the shop were to remain vacant for the next 6 months? what would be the fit-out period of a new tenant in terms of their brand guidelines? Are the new tenants willing to pay rentals for the fit-out period? What are your fixed costs?

Elimination due to non-compliance. Most companies would have a vendor engagement and review policy. The policy may include vendors remaining compliant in terms of various statutory requirements (for example GST, Tax Registrations, Trade License renewals, Pollution control clearance, acceptance of digital payments, integration with the company’s ERP, etc.). The CFO of the company might be under pressure (internally and externally) to review and ensure the status of compliance periodically. As a vendor, take proactive steps to ask if your status requires updating instead of the company chasing you. Ensure that you have ticked all the boxes. In case anything is missing, proactively communicate asking for timelines of ensuring compliance. The company appreciates such communications. 

Review of existing contracts or SLAs (Service Level Agreements). This is an opportunity for both parties to review the important clauses in the contract. Pre-existing buy out or ask out clauses can make you more vulnerable. It is better to stay ahead with the information on what strategies the company is adopting to reduce costs. Plan and rehearse your reaction to any eventuality. Renewal is also the time when certain clauses get added to the agreement. You may like to negotiate for a balance; sufficient notice, compensation, etc. in case of any early termination.

Take a deep dive into the internal policies of the company, to find what works to your advantage. Indian Public Sector Units have the policy to allocate 25% of the business to M/SME vendors.

Now that you have stretched yourself in serving your employer, you would also like to identify areas to reduce costs internally and offset some of the additional expenses. This may be your time to renegotiate the rents for your shop/factory premises or de-hire some unused portion and take remote expert support. Discuss an incentive plan with your sales team instead of fixed pay. For manufacturing set up, review the rationale of the ‘shifts’ the machines are running. Can you move your production hours to items with higher contributions? If the manufacturing costs are more fixed and indispensable by nature, can you look at reducing other overheads like SG&A (Selling, general & administrative) expenses? 

Leaving out areas like; regulatory compliance, key people costs and debt servicing from cost-cutting may be practical. Servicing debt through regular instalments may be difficult at this stage unless you have accumulated some good reserves. It is a good idea to consult your Bank and get your facility restructured. Getting classified as nonperforming can hurt your long-term credit records and you may end up paying higher interests in the future.

Downturns can be short, but the pain may continue longer. Managing costs and remaining relevant are some of the key tools to tide over the time. Also, to remain nimble and prepared such that, when opportunity starts knocking at the door, you can derive full benefits and ride on the next growth curve.

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