THE SECRET SAUCE
Corporations were interested in giving a helping hand to minority-owned companies - not a hand-out - in the early years of supplier diversity. They were willing to help them get in the door and to reach a certain level, but they were not guaranteeing a contract for life. In order to get a contract for life, your company had to out-perform everybody else that was performing the same service. Once the helping hand had been extended and you took it, you had to quickly transition to leveraging that helping hand to get new business with new customers.
Large companies are very judicious when awarding contracts to minority-owned and/or woman-owned businesses because of what is known as a “pass through” or “front business”. Majority owned companies would find someone diverse – it could be a woman, a Hispanic, African American, an Asian, etc., or in today’s world, a gay, lesbian, or veteran and use that person as a “front” to have their company qualify as a minority-owned business. The person whose name the company was in, in some cases, did not contribute to the company in any form or fashion as the majority-owned contract provided operational and back-office support for the entire effort. Large companies recognized that these arrangements did not meet the intent of growing operational and financial capacity of the business controlled and operated by the minority/woman. Corporations began to implement procedures to discourage these arrangements. They were not going to support people gaming the system, thus they began to carefully vet the companies to whom they award contracts. It is therefore imperative that you are transparent and above-board in your dealings with them, and you have a genuine desire to build a legitimate, standalone business even if you partner or team with a majority-owned business to help get you started..
When going after a multi-million-dollar-contract with a large company, a Strategic Alliance can help you simplify the process and navigate the maze. Here I will discuss how to utilize what I’m calling “the secret sauce” in this type of transaction. I will use an illustration of a situation that a prospective client encountered. It is one of the trickiest ones but, if you do it right, you will never look back.
My client has a woman-owned business and she has been presented a fantastic opportunity by a major tech company. They love what she has been doing and have offered her company a substantial multi-year contract - anywhere from 5-to-20-million dollars. Her company alone isn’t able to handle the large contract but she has a strategic partner/supplier – a much larger company - with whom she has a relationship that can help her fulfill the contract. They actually are able to provide the operational support that she needs because her company just isn’t big enough. Her ability to tap into their staff, their processes and their people just makes a lot of sense as part of her go-to-market strategy. In this illustration, the tech company wanted to make sure that my client was not being taken advantage of by the larger company who incidentally, would be willing to sacrifice 10 or 15% of the contract margin and just pay her company and thereby get the bulk of the contract without paying my client any real money.
The tech company wanted to guarantee that her company would materially benefit for the purpose of creating a viable business that could stay in the market for the long term.. They didn’t want to give her a 5, 10 or 15-million-dollar contract and she only got 5, 10 or 15% revenue from it and yet her company was not set up to succeed after the contract ended.
There were several things that my client needed to understand about her own company before she considered getting into a supplier partnership with the other company.
The first thing was the relationship that she needed to have with the supplier partner in order to make this work. She had mentioned that her company supplied a lot of the same services as the supplier solution partner. That’s tricky because the risk you run in this situation is that your supplier solution partner can potentially do an “end-run” around you. Their sales people can walk into the client’s office and tell them that “Hey, you’re paying her company a 10, 15, 20%, etc . markup for something we can do cheaper”. The tech company therefore would reconsider paying that extra money to my client if they could get the exact same thing for less. That’s a really difficult issue to navigate if you find your company in that situation. Additionally, what my client had to do was to establish upfront with the solution partner that her company would handle and manage the project – that she would be the primary interface and serve as liaison and project manager with the tech company. She also needed to stipulate that her company was the face of the contract. Her solution partner’s business development people would not need to talk with the tech company about this contract for any reason if they did not otherwise have business with the tech company.
If her solution partner does have other business with the tech company, she must make it clear what the rules of engagement are regarding the contract, and they must understand that the contract allows for penalties should the solution partner attempt to do an end-around or violate the confidentiality agreement.
She must establish primary control over the contract. Additionally, what she needs to do is to look over the entire portfolio of products and services and pick out three-to-six that her company can perform in-house. She then needs to build a staff around these products/service offerings, so that when an invoice goes in for that particular line item she gets 100% credit for it because her company performed 100% of the effort. For the other line items, she must negotiate with the solution/supplier partner that they will cover overhead plus a small overhead fee and a small profit because her company is doing cost of sales, invoicing, customer service & follow-up, and will expect to get the products/services at cost.
Following this approach for the business model allows you to position your company to continue to function in the project role and as the chief technical person for the entire contract. As your employees become more proficient, there are more tasks they can perform, and after six months, a year, or two she will actually have a very good business. Another consideration is whether her company is taking the most profitable parts of the contract, because in this example the tech company specifically wants her company to grow in profitability.
Finally, how you and your supplier partner will be paid by the tech company needs to be decided. The tech company wants to be sure that her company is actually getting the benefit from this contract, and your supplier partner wants to be sure that they are being paid too. The better way to handle this is to have the tech company issue the check in both companies’ names. This satisfies the tech company‘s auditors as to whether the funds are actually being paid to a minority/diverse/woman-owned business. It also enables her records to show that the funds were indeed paid to her company. How cashflow is going to be handled between her company and the supplier partner also needs to be ironed out. Some supplier partners will front you your portion of the revenue when the invoice is generated, and some may not pay you until the check actually hits the lock box at the bank.
When you negotiate all of the aforementioned issues and have a solid contract with the tech company, and an agreement with your supplier partner, then you have designed the contract so that you actually use it to set your company up for long-term success.
In summary, look at the entire portfolio of products and services covered in the contract, select the ones that you can do better than the competition and keep that portion of the contract in-house. Your people perform against that, and the remainder you outsource or subcontract to your solution partner.
Remember that YOU must manage the contract; YOU must be the project manager and “the face” of all activities; and YOU must be on top of what is being done at all times by anybody performing under the contract.
Once you have all of these ingredients in place, you will have the “secret sauce”.