How “commodity thinking” can help manage contracts better

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When President Obama last week called for the FCC to declare broadband Internet service a utility, it naturally helped that long-burning fuse burn brighter to its conclusion – whatever that is. There is going to be more debate about the merits of this, and a good deal of shouting, too, from advocates on both sides of the issue.

The president’s announcement, however, should serve as a reminder to everyone that what was once “innovation” eventually becomes just another commodity – and be treated accordingly.

This thought was brought home to me when a friend was looking over their phone bill for a land line (which, by the way, they never use) and read off all the mystifying charges. After a pause, she asked, “Why am I paying for this?”

But that’s what happens when your service becomes “just another” commodity.

Of course, there is a flip side to that downside. For any business or enterprise with dozens or hundreds of contracts in place, there can be a real advantage to viewing some contracts through a “commodity” lens.

Thinking Commodity

In every organization, service contracts can probably be grouped into those that are strategic, or particularly complex (the two may go hand-in-hand) and those that are not strategic. Of course you don’t want to treat strategic, special or very complex service providers as commodity suppliers, but for the nonstrategic, “commodity thinking” may help you manage contracts better.

In a commodity-based relationship, the essential calculation is price/cost versus value/quantifiable benefit. The additional calculation should be what other benefits your organization obtains from continued purchase of that service. For instance, if an Internet service provider is providing high-quality T1 lines/service to your company, do they offer any benefit for the length of the contract?

You can compare one ISPs price on a given bandwidth and service access to another, but the deciding factor often comes down to the final contract price – usually locked in over a period of time.

Commodity management made easy

When your non-strategic service provider has either many competitors, or very good competitors, this puts your organization in the driver’s seat. At least it should – especially if your company employs a contract management solution.

With a central database of contract records, you can track your non-strategic service providers with your “commodity” criteria.

A contract management solution helps you do this by allowing users to:

* Write contract summaries or write out key contract clauses in specific fields for quick reference.

* Create clear, concise financial summaries of contracts (for easy cost/price look-ups as well as to record and evaluate cost/benefit over time),

* Easily schedule of contract reviews (either internal or external) so that key users of these services can offer feedback on real benefit and performance.

* Store or link to information from competing offers or competing services. These can be anything from associated notes on what a service provider’s competitor is offering, to links to web pages detailing a competitors price structure or new offerings.

Given a database where any manager or admin can store and record the above kind of information, your organization will have a solid foundation on which to judge its service providers.

Of course, one could still try to do all of this without a contract management solution or database, but it is easy to see just how time-consuming that kind of work can be. A collection of computer folders within folders containing related PDFs, scans or Excel files won’t make the task of tracking service cost/price and performance over time very easy. Even if you have dedicated contract managers updating all those individual files, its not the same as having a fully functioning database.

The truly great thing about a database is not just that accurate records can be stored and retrieved, but it’s what your organization gains from reviewing a lot of information over time, or being able to compare apples-to-apples.

Of course not every contract should be viewed as just another “apple” – a fixed-price commodity selling among barrels of competitors. But certainly viewing some service providers this way can make it easier to determine value.

[About the author: Todd Hyten is a former business journalist who now writes about B2B topics and consults on content marketing. You can find him on Twitter and ]

Photo Credit: numberstumper via Compfight cc

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