Should we talk about Hourly Cost or the Quality of Deliverables ?

This year's pricelist negotiations between Subcontractors and Big Customers in subcontracted engineering business were hard work, mostly thanks to the governments Competetiveness agreement (Kiky) in Finland. There is clearly something gained for the Subcontrctor from the Kiky, and obviously the Customers wanted it all. We got some hours more for year 2017 thanks to KiKy but at the same time there happens to be a few working days less this year.

Pricelist negotiations are not my favorite things. I wonder if anybody loves that work, not from the Supplier side or from the Purchaser side. There are real reasons for raising the prices : the costs usually do go up every year... Salaries, rents, logistics, licensies, insurances, all kinds of costs for running business tend to grow, not diminish. Then we look at third party indexes and statistics to tell the Customer that it's reasonable to raise the costs a bit, and they show some other data to tell the opposite plus of course the Competitors are hinted to lower their rates... And by lowering costs the business might grow, though that is seldom guaranteed - and there is often some truth for this also. Then there's the case that sometimes one side looks at history data and the other side looks forward by calculating how some decisions (like KiKy) affect the coming costs.

For a Supplier the situation is usually like this : if the Hourly Rates don't go up enough, it can either cut down costs or margins. Cutting down costs means cheaper designers, tools, less training for the personnel, less salary raises and thus higher attrition rate and less own development for reusable assets, processes etc. That means lowering quality of service, and in a longer run worse deliverables. Cutting margins means better and new negotiatiors for next year... Quite seldom the personnel want's to cut their salaries, and the negotiators would really like to keep their jobs also.

For normal sales setting the price is quite simple : I just define the prices and it's up to the customer to either buy with that price or buy it from somewhere else. I have the right to set the price and the Customer has the right to buy or not. I like that.

But, when there is a relatively big business going on between the Supplier and Customer it's not that easy. The Supplier doesn't have the option of just defining it's own prices. In reality the Customer also doesn't have the option of not buying, but they do have the option of slowly directing further purchases to a Competitor. That's when we negotiate the pricelists...

For the supplier side, it's very tempting to head for lowering hourly costs and increasing sales -loop, which inevitably also decreases margins. The Customers really values lower pricelist. Or to be more specific, the Purchasing Manager does. And depending on a company, a Purchasing Manager has a bigger or smaller Gate Keeper role. Usually, the purchasing department doesn't really need or buy anything, but it can boost or hurt the sales by directing RFQs to preferred suppliers. On the other hand, the R&D -department and Product & Project Managers and in the end the end-customers value the Deliverables really much more, meaning that for a long term success the quality and timeliness of Deliverables is what defines true success. And what affects the Deliverables ? Quite simply it's things that cost for the supplier, like processes, tools, training, reviews, testing, audits, good management, available assets and most importantly really competent and skilled Engineers. And I think of it like this :

Truth is, the cost for getting quality products out is seldom only about the Hourly costs, though it of course affect also. The cost for designing the end product or service is also affected by having efficient design processes, understanding the requirements and priorities, reusing old designs, handling the project professionally, having experienced designers and seasoned project managers, having a team that is used to doing good cooperation, investing time for Test Automation, doing longer term cooperation etc. But all that is seldom interesting for the Purchasing Departments. Why ? Well, I'd guess that Purchasing Managers bonus is tied to average Hourly cost and nothing else, but that's just a wild guess and may be completely wrong...

For an Engineering company's Customers, the really important thing in the end are the high quality products and services with which to compete in the global markets. And to have the best possibility for success making them in cooperation with an engineering company, both parties should work on :

• Understanding the use and need for whatever is being developed. All the time prioritizing the development so that the intended most important use is advanced first and tested as soon as possible. This should be tied to good Product Management and ability to make decisions during the project !
• Analyzing Risks and reducing them starting from prioritized ones.
• Understanding what the directives, standards, quality standards, environmental requirements, interoperability requirements, safety standards, Quality of Service, and other possible such commercial or legislative requirements mean for the design. 
• Checking how the processes of the Supplier and Purchaser meet each other, go through responsibilies, dependencies, deliverables and expectations -  communicate the real priorities and requirements to all stakeholders.
• Making the cooperation profitable -> Good money for the Supplier guarantees best resources, profitable end product makes the Customer prosper and come back. Neither one should be happy unless both win !

The money is flowing from the Customer to the Supplier, so it is the Engineering Company's primary target to make the cooperation smooth and happy. But R&D Subcontracting is in the end like dancing, it takes two to Tango !

If You want to enjoy the dance, get the Best partner, not the cheapest !