Don’t let your business contracts run year after year on autopilot. This is how you end up spending way more money on goods and services than you need to. It’s a problem I see at nearly every business I’ve worked at.
Problem is, upending something that is working well can also be more expensive than any potential savings you are looking to realise. Or worse, you can turn the project planning stage into a distracting, time consuming nightmare that gets you nowhere.
In this article, I’m going to write a little about this. I’ll talk about one of my experiences with a business that had a service contract for over 10 years. I’ll close with a ‘moral of the story’. Finally I’ll have a small plug to reiterate that this is the kind of work I can do for your business. I hope to entertain and educate.
COMMERCIAL ATROPHY – this is my definition for what happens to long business contracts that do not get updated, refreshed, or changed, in a long time. It defines two big problems: one, price increases, and two, service deterioration.
Take a look at the pricing clauses in your contracts. Many businesses that provide goods and services to other businesses will have clauses around a yearly price increase, often quoted as a %. It may be reasonable for a rolling yearly contract to have some scope to increase prices as the value of the £ continues to fall, but it will have one quite profound effect – or should I say, compound effect?
If your services costed £100 in the first year, with a 10% rise yearly, then it’s £110 in the second year – and that £110 goes up 10%, to £121, and so on and so forth – until a £100 contract is now costing you £260 after 10 years. This can either be built into the contract, or you could have a fixed fee for 3 years, and then go onto a rolling contract each year. Either way, it’s bad news for you!
The second problem is service deterioration. Over time, the services rendered get worse, or at least, do not tend to keep up with the market. In every instance where lazy angles and shortcuts can be taken, they will, because you’re not going anywhere and they know it.
This is the tale of Local Shredder and their over 10 year services contract for Local Company.
Local Shredder did just that; secure shredding for businesses with lots of sensitive documents. Running your own heavy-use shredder is a pain; it requires maintenance, and the paper requires disposing of afterwards, all whilst guaranteeing no-one will be able to steal information from your documents. So, many businesses, like Local Company, use secure shredding services from companies like Local Shredder.
It started well; a few competitive quotes were put together and a provider was selected. A contract was signed, and the service worked well for 10 years.
That was, until I came into the picture. Now, I’ve dealt with a lot of contracts exactly like this, and even with the same provider, at different businesses. I know what a good price is for shredding services, and I knew we were paying double. A fair bit more than double, in fact.
I took some time to understand what the invoices and the contract looked like over time, and it told me quite a story. The original price seemed competitive, and didn’t have a price raising clause. It was originally signed for 3 years with the stipulation that afterwards there would be a rolling contract renewing each year automatically. Signing the new rolling contract wasn’t necessary as the original contract stipulated a requirement to notify Local Shredder that you wanted to cease services, even as the original end date on the contract came and went.
Of course, that meant new terms; they could add new fees, add new charges, increase prices, decrease regularity, and they didn’t need a signature from us to sign off those approvals. They didn’t even need to notify Local Company that this was happening.
Now, let’s not get too conspiratorial. A lot of these clauses and things are very standard and are very reasonable. Businesses like Local Shredder have to do a lot of planning, so rolling contracts can be more expensive, hence might have more price flexibility. Likewise, someone managing this contract for Local Company needs to actually spend the time understanding the contract and what it means, and plan for the future themselves. In this case, as is in most cases, it took a few years of Commercial Atrophy to get to a point where neither the Local Shredder nor the Local Company were paying much attention to the contract at all.
The problem is, that the price and service flexibility offered by the new rolling contract inevitably gets exploited, and usually not for malice or for ‘profiteering’ reasons. Life happens to businesses the same way it does to us, and they’ll flex their flexibility one way or another, and tend not to retreat from its new position if it serves them well, and if Local Company’s manager doesn’t deal with it, it gets expensive. This is why you can’t let your contracts atrophy. Terms are only good for their stated length of time.
So, what happened in this case? Well, firstly, the cost was now very high. Local Company was being charged hundreds of pounds for a single collection of an increasingly smaller amount of documents each and every month. The invoice included more charges; fuel surcharge, distance surcharge, and an administrative fee was added too. The distance surcharge was in relation to one reduction in service that Local Shredder had experienced; they’d closed a nearby shredding depot, and thus it was now more expensive for them to collect from us. Luckily for them, we had a rolling contract, so all they had to do was charge us the difference, and they didn’t even need to tell us.
They might not have been contractually obliged to but it would have been nice.
The first thing I did? I called up Local Shredder and asked them for a discount. This is often the best way to start, as you’re firing a warning shot over their hull that you’re really looking at your arrangement and not necessarily liking what you’re seeing. Always do this first, in my opinion. Sometimes, just sometimes, you’ll be able to negotiate a discount that wards off the need to really look at the contract (for now). Don’t forget, time is money, and changing a provider can cost a lot of time. I’d accept a discount that still priced them above competitors if it meant I didn’t have to do anything more than pick up the phone.
This didn’t work. Not only did it not work but the customer service was terrible. I was given a Teams meeting with some disheveled, scruffy, clueless idiot in a creased t-shirt who called me bro. He hadn’t bothered to read or understand the contract before our conversation. I was then passed to an Account Manager who presented herself properly and addressed me respectfully as a paying customer (good start) – but said she MIGHT be able to agree a 5% discount. Two months later, I hadn’t heard from her.
Now, I don’t think a decade old loyal customer deserved that kind of treatment.
I did what I usually do in this case: I looked at competitors. This is often quite a fun part of the job because you’ll canvas five or six companies, but one of them will jump out at you. One of them will really let you know that they want your business. They’ll waive fees, they’ll give you a discount, they’ll do whatever they can to secure your business. This describes the business that I eventually selected to replace Local Shredder.
The new service was now going to cost a total of £70 per month to empty 7 shredding bags. They’d also waived rental fees for the lockable consoles that the bags are kept in. Our new shredding consoles were delivered and carried by two gentlemen from the company upstairs to the appropriate rooms. They labelled them, prepared the bags, gave me the keys, and said see you next month with a smile. Fantastic price, fantastic start, everything going well.
The withdrawal of services from the original Local Shredder was rubbish; it took them weeks to arrange to collect their shredding consoles and they’d insisted that they were all brought to the ground floor for collection. Embarrassing. It was like a parting reminder as to why I did this in the first place.
The new service was perfect. Regular collections at a low cost. Moreso, I have faith and trust that any problems can be ironed out, and for as long as the Local Company ensure it reviews its contract costs at least once every two years, then this can be a fruitful and mutually beneficial relationship.
But they better keep on their toes because Commercial Atrophy looms where oversight lacks!
This was just one small recent example of Commercial Atrophy that I’d managed to correct. It was for a relatively small saving, nothing as grand as some of the other articles I will be publishing. But shredding is one of a few dozen small services that businesses contract out. Think about how much a business could be overpaying if they don’t review their contracts and test existing arrangements/prices against what the market is offering. This might just be a few thousand per year, but now multiply that by a minimum of 12, and then look at your financial planning over 3 years. Can you really afford not to?
There’s a few things to learn from here for everyone, and I’ll bullet-point each one:
- Don’t let your business contracts atrophy over decades! Not looking at these for a long time will mean you are almost certainly paying far too much money, and getting far worse a service than you could be.
- Don’t be afraid to reach out and ask for discounts! Good businesses will do everything they can to keep your business. They know that a 5-10% discount is much less than a 100% discount after you leave.
- Make sure your suppliers treat you and your business with respect! The customer service agents scruffiness foreshadowed the entire experience. Make sure they respect your business, your time, and your money!
- Know your requirements! You don’t need a jumbo jet to get to the next village. Make sure your arrangements are as suitably small, low-cost, and low-impact as they can possibly be.
First Published: 16th December 2024
Plug:
This is the kind of work I’m good at. I’m not afraid to chase difficult conversations, and I have experience breaking those old arrangements and fitting in new ones that work better, come from a supplier that will respect your business, and most importantly, cost less.
Commercial Atrophy is real. There are suppliers out there that sit on your contracts forever; never innovating, never working on their existing arrangements, never looking to expand or create better services. They are enabled by the fact that people are too busy, and often, people don’t know enough about these things to confidently tackle them.
More so, some people just don’t want to get on the phone to ask for discounts under the threat of leaving. It’s hard for some. Not for me. This is my bread and butter, and this is the best way I can make businesses work. I want to make sure as many bad suppliers around the country get dropped from business contracts as possible, because that is all wasted money. All of that money is better off in the hands of businesses that value you.
Get in touch today to start a conversation about what I can do for your organisation. As I write this now, I’m taking consultations for free, and I’m even doing some work for free too. I want to show you and other businesses that I’m very serious about this work and that I can make changes to their business that they never thought possible. I can’t wait to meet you and face new challenges, and I know you’ll walk away a very happy customer of mine.
Thank you for your time.