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Andrew Chang, the most senior person on SenTel’s team, stressed that his company is in no position to pay the fees Ty Technologies proposed. He acknowledged the new service contract reflects an overall higher service level than before. The problem, he explained, had to do with the current economic climate.

Now, in the third meeting with SenTel, Hans Beyer’s mind is working hard and fast on what to do next.
Andrew Chang, the most senior person on SenTel’s team, stressed that his company is in no position to pay the fees Ty Technologies proposed. He acknowledged the new service contract reflects an overall higher service level than before. The problem, he explained, had to do with the current economic climate.

Now, in the third meeting with SenTel, Hans Beyer’s mind is working hard and fast on what to do next. He knew that SenTel’s switching cost is high in monetary and non-monetary terms, but not high enough to guarantee contract renewal at a higher fee. Previously, Chang had mentioned that SenTel favored services from Ty Technologies over those from other providers who are offering better terms.

He concluded that the objection to the contract is not differentiating Ty’s services relative to the competition or negative past performance issues. Chang showered Beyer and his colleagues with accolades about their service performance. In past negotiations, Chang sometimes complained that service delivery did not meet SenTel’s expectations.

Beyer paused silently to make sure Chang did not have any more comments to make. Beyer then thanked Chang for his remarks and assured him that the Ty team will work diligently to accommodate SenTel’s needs as they have done over the last five years. He thanked everyone in the large briefing center conference room and said he looked forward to continuing their dialogue the next morning as previously planned.

Ty Technologies’ CEO picked Hans Beyer, vice president of services, to handhold this deal with SenTel, a major client. At stake is a $60 million, two-year contract that has gained importance inside Ty as sales failed to meet forecast. Over the last few years, Beyer’s organization consistently met SenTel’s sometimes-unrealistic expectations. As a result, Beyer was highly respected by SenTel management. Ty’s senior management, therefore, had good reason to count on Beyer to close this deal.

SenTel, a large wireless communications network operator, is a long-time user of specialized communication switches developed by Ty Technologies. Ty also supplies SenTel with advanced software for managing their complex networks. Because no two clients’ networks are alike, Ty custom designs and installs a unique solution for each client, including SenTel.

Beyer and his team reconvened in another meeting room once the SenTel folks left. After a quick assessment of the meeting and the overall situation, they conclude that the 15% increase in the new contract over the last one is well justified. At past performance reviews, SenTel repeatedly asked Ty to respond to Severity 2 service requests in one hour for 85% instead of 79% of the cases. The 15% increase reflects, in part, the added cost of providing the higher service level at a reasonable margin. The contract fee also reflects a 5% year-over-year increase that was tied to inflation to protect Ty against future increases in labor costs.

Beyer is to brief his anxious boss, the CEO, over the phone later in the evening. Beyer warned the team that he didn’t expect his boss to let him walk away from the deal even if that were the prudent course of action. Losing SenTel’s service business could lead to a workforce reduction. With input from the team, he settles on two options.

The first option, a shared-risk, shared-rewards option, may offer a potential compromise that is supported by the organization’s performance track record. Ty is paid the new and higher service rates if it meets the forecasted service level; otherwise it receives a significantly reduced rate. Beyer expected Chang to object to the variable cost component of this option.

The second option is to meet SenTel’s price at a slightly lower service level for a limited short time. Ty can offer one-hour response to Severity 2 problems at an 81% service level for six months only. Beyer reasoned that if he had to accept this option to satisfy his boss, then at least he didn’t have to live with lower margins for very long. He thought Chang might object to this option because the proposed 81% service level is less than the 85% SenTel now requires.

Beyer left the team meeting to call his boss, realizing that he may not have much of a chance of making this deal happen on terms that did not compromise the bottom line.

ServicesRevenue case studies illustrate realistic service marketing or sales situations but do not portray any specific organization. All company and individual names are fictitious.

Doug Morse and Carolyn Faehling offered their perspective on how to deal with this challenge in ServicesRevenue Volume 1, Issue 2. Subscribers click here to download the issue. Visitors and lapsed subscribers, thank you in advance for subscribing.