Why the big fish you’ve just landed may bite back
Monday, June 10, 2019
Think big, they say. After all, why would anyone turn up their nose at a huge slice of business? Consider the revenue, the prestige! Maybe even take a moment to bask in the envy of your competitors.
But there are potential drawbacks to weigh up as well. Big client contracts can be risky, especially if they cause an imbalance to your business – including the classic danger of too many eggs in one basket.
In recent years, a number of print businesses have plunged into serious financial problems following the loss of a major contract on which they were over-reliant. Some even going to the wall
Others have had to slash headcount in the wake of a big account walking out the door. Unfortunately, this was recently the case for Delta Group which reportedly had to make more than 100 staff redundant after losing the multimillion-pound contract for supplying POS materials to supermarket giant Asda.
Others still have lost money in failed attempts to land big chunks of work. De La Rue, for example, last year wrote off £4m in costs incurred in a failed bid to retain the huge £490m UK passport contract.
What, then, are the pros and cons of big contracts? And what steps should you take to ensure the Champagne feeling that comes from securing a big contract doesn’t turn into a dreadful hangover for the business?
Webmart founder Simon Biltcliffe says the best mitigation strategy is to have plenty of midsize customers and not become over-dependent on a single account. In his view, a 20% proportion of revenue should be the “absolute maximum” exposure, although around 10% is preferable.
“It’s just common sense,” he elaborates. “Don’t become over-dependent or believe it will carry on forever; no contract is forever, there are a million reasons that you can lose them. So be mindful of: if it went, what would you do? Build that into your planning. It’s not a disaster recovery plan but it’s a similar kind of approach.”
As BPIF CEO Charles Jarrold observes, sometimes a big contract win represents the difference between healthy profits versus considerable losses. And if the contract is secure for a number of years, taking it on may make plenty of sense.
“The important point though is for the business to take a moment to think about the consequences medium term,” says Jarrold. “What’s the impact on the work mix? What’s the pricing like? What demands will be placed on the business and will this impact on other customers? What can be done to reduce the impact on the business should the contract come up for renegotiation in future. Try to think beyond the obvious.”
Interestingly, it was the loss of the Asda account to Delta back in 2011 that dealt a hammer blow to the viability of once-mighty POS specialist Bezier. The business limped on for a couple more years until the loss of a £10m contract with Boots proved terminal for the print arm. The consequences of losing a big chunk of business can be dire.
Running a large account as its own P&L offers some future-proofing advantages. Hobs Group CEO James Duckenfield says: “Identify who is associated with delivery in a clear way so that in the event the contract moves the team can move with it.” He also advises keeping investment cycles in step with the contract lifecycle.
Ryedale Group managing director James Buffoni says his largest single customer accounts for less than 10% of revenue while the top 50 customers combined contribute around 80%. Generally, he believes, a balance should be struck by retaining small/medium clients so that you remain viable in the event of contract losses.
“If larger contracts provide a satisfactory financial arrangement with realistic deadlines, controlled reordering and timely communication, it is worth investing resources – for example, account management,” says Buffoni. “But obviously, as we’ve seen in the news, all eggs in one or few baskets can be a risky business.”
Paragon Customer Communications client development director Nick Barbeary notes market conditions are changing dramatically. As clients develop, there is a need to mirror their requirements and invest to meet those needs. What that means for a business of significant scale such as Paragon, he argues, is that it “cannot afford not to invest” to attract large scale quality end-user accounts.
To create new relationships of this kind calls for a more formal strategic environment. Arguably, not all printers will be comfortable with the notion of working in this way.
“For a business to invest to attract these big accounts you need firstly the right mindset, to create the environment of strategic thinking and consultancy. Understand your clients’ challenges and be able to articulate the solution back to them in a professional manner supported by financial models and resource requirements,” says Barbeary.
“This resource is critical and is all about employing the right people that get it and know-how to deliver true value to support clients’ business objectives. In a marketplace that is delivering less daily tactical opportunities within the traditional sales environment, only companies that think differently will survive and move away from fishing in a smaller and smaller pond as their horizon expands.”
BCQ Group chairman Richard Knowles sees signs of upheaval and opportunity in the print management market centred on big chunks of business. Print managers, Knowles says, thrive on large, high-profile contracts and have done a great job, at the expense of traditional printers, in capturing a large chunk of the major contracts placed in the UK.
“However,” Knowles expands, “as the print management model becomes ever more mature and larger organisations look for further economies in the way they use print in their businesses, they may have lost the skills and expertise internally to buy print well and there will be opportunities for direct printers to both bid for and win contracts on the basis of a risk-free, comprehensive, ‘in-house’ service offering at competitive and most importantly, sustainable rates.”
A large account win may also come with some tricky employment law implications. Quite a few businesses have been caught out by Transfer of Undertakings (Protection of Employment) regulations, better known as TUPE, which may mean you are legally obliged to employ members of the team that previously looked after the contract. A PrintWeek feature on TUPE a decade ago began by referring to the regulations as the dark cloud on the blue horizon of a big contract win, and little has changed in this respect.
TUPE applies if an “identifiable economic entity” is being transferred. If there is a previous contractor who had a supply and/or service contract which is now being transferred, TUPE will apply. If previously the work was contracted on an ad-hoc basis as and when required then TUPE may not apply. So when taking on a big contract, the supplier should check carefully what the exact situation was for supply of the goods and services. If the contract is just for the supply of goods for the customer’s own use, then TUPE will not apply.
Having determined that TUPE does apply to the new contract, you then need to establish which of the previous supplier’s employees are ‘in scope’ and therefore potentially will transfer their employment. “Employees of the old supplier who are part of an organised grouping of employees, and who are wholly or mainly assigned to perform the contract, that is they spend more than 50% of their time on the contract, will be in scope to transfer,” says BPIF head of legal Nicola Langley.
If there are employees of the old supplier who fall within scope and are entitled to transfer to the new supplier under TUPE, then the new supplier has various obligations. The new supplier must inform the current employer in writing of any measures it intends to take in respect of the transferring employees, such as changes in reporting lines, job titles, relocations or redundancies. Plus, the new supplier is not allowed to make any material changes to the terms and conditions of employment of the transferring employees.
Both suppliers have an obligation to consult with affected staff. Failure to do so may be costly. Employment Tribunals can award compensation of up to 90 days’ pay for each employee.
Any dismissal of employees related to the transfer will be automatically unfair, so it is vital to take advice from an HR professional if you intend to make redundancies.
From an employee perspective, TUPE regulations are designed to ease minds over job security concerns. But while an employee’s rights are protected when a contract is transferred, the move to another employer is not necessarily a desirable outcome.
“Freedom of choice is taken away from the candidate, so although it is protecting some rights, it is taking away others,” notes Harrison Scott joint managing director George Thompson. “Someone could perhaps be transferred to a company they don’t want to work for or have worked for in the past and have had a bad experience with.”
It also works the other way. For example, the new employer could be much larger than the last, offering greater job security and enhanced career prospects.
Switching back to the employer’s perspective, Langley is also keen to underline the fact that print businesses must be mindful that big contracts come with risks as well as rewards. She advises poring over the nitty-gritty of the agreement so as not to become trapped in an unprofitable arrangement.
“If the contract is for a fixed term, typically three or five years, then I would recommend that you build in a mechanism for price increases during the term,” says Langley. “You may also want a notice provision during the term or ‘break clause’ so that in the event that it becomes unprofitable you can get out of it before the end of the term.”
With a big contract, it’s also advisable to pay attention to the liability clause. Make sure this is limited or capped and that your insurance provision covers your total potential liability under the contract.
In the heady glow of closing in on a substantial new contract, it’s easy to push thoughts relating to much further down the line from your mind. Yet, before you sign up, consider carefully what will happen when it ends. For instance, you might look at building in a clause that ensures your customer will be liable for any stocks of finished goods or raw materials that you have bought in specifically to service the contract.
“If the type of goods that you are supplying may be changed or developed during the term, you should also consider who will own any intellectual property rights in the design of the goods, and make provision for that in the contract,” adds Langley. “Finally, do ensure that the contract specifies the legal jurisdiction for any disputes or claims if your customer is located in another country. It will be more difficult and expensive if you have to bring any claim in a foreign jurisdiction.”
There’s a huge amount to get right if you’re looking to land a big fish. Paragon’s Barbeary takes the view that it’s only possible to land major contracts when everything within the process fits: people, solution, service model, chemistry, appetite for change, previous experiences and future requirements must all match perfectly with stakeholders, procurement owner and business objectives.
“Never under-estimate how hard this is to achieve or how long this will take to land,” says Barbeary. “The journey can be a long one and does not finish when you sign the contract. It is an ongoing approach that, once mastered, drives further success that enables your business to plan on more predictive revenue streams. Once a contract is signed it then provides the perfect cross-selling platform.”
The industry has to some degree moved away from huge volume contracts as the nature and use of print changes to a more targeted model. However, most printers do have key clients who are critically important to the business. And, in a world where excess capacity is prevalent, there’s a strong temptation for competitors to try to win work by offering highly competitive prices.
Historically, this has led to work moving around the industry at lower and lower prices, often entering uneconomic territory and ultimately leading to business failures. Printers should be aware that this can and does happen, the BPIF’s Jarrold observes, and should “keep their work mix and contract balance under constant review, understanding and planning for the impact of pricing changes, contract wins and contract losses. That’s sensible risk management.”
Equally, if not more importantly, you should be thinking about how you can add value to the service you provide by becoming a trusted partner to your customers. In this way, you can convince them it’s in their best interests not to switch supplier.
As we know, when big switches do occur it can be devastating for the company that loses out. When businesses struggle or collapse as a result, they make headlines. And in the jobs market, candidates are well aware of this.
“We have found that in recent years, high on the list of candidates’ biggest concerns is job security, whereas in the past the focal point was salary and career prospects,” says Harrison Scott’s Thompson. “Gaining information about largest contracts is now high on the list of questions when handling vacancies with new clients.
“Providing candidates with this information puts their mind at ease in relation to job security concerns. Candidates are much more wary than they used to be when headhunted for a new opportunity, as they are much more aware of the impact these contracts can have on their livelihoods.”
Thompson adds that a wise man once told him that maths can be applied to everything in life, particularly in business. Certainly, there is the well-known risk formula: risk = probability x loss.
“I am no mathematician,” says Thompson, “however I wonder if someone has worked out that if a company is X T/O and wins a contract that is Y, equalling 10/20/30% of their business, then if the contract is lost, how much it would jeopardise the stability of the company?
“There must be some theory to determine that if a company was a certain size and they set out to acquire a contract that was as much as 30% of their business, they would have to implement a plan B to aggressively expand their company to make the overall size of the business much higher in order that what was originally 30% of the business, in a higher turnover company is diluted to 15% or 10%.”
Sounds prudent. And if a prominent academic hasn’t already devised a theory along these lines…ladies and gentlemen, we give you Thompson’s Law.