PIPping to Outsourcers and OEMs

End-user customers become nonusers and noncustomers when they outsource an operation to a third-party provider. The outsourcer—or the insourcer, if a customer's operation is managed internally by the third party—becomes the customer for the products, services, or systems that the original customer no longer needs to purchase, install, maintain, or upgrade. When this happens, the outsourcer becomes the decision maker.

In order to ensure the cost-effectiveness of the operations they manage on their customers' behalf, oursourcers buy low. Since customers rarely know and hardly ever care about the names of suppliers an outsourcer does business with, outsourcers are the ultimate price shoppers. Any supplier who meets their specifications is immediately commoditized. In much the same way as an original equipment manufacturer obscures the component parts that are embedded in the final product, supplier brand names become subsumed in an outsourcer's sytem.

At one time, Electronic Data Systems (EDS), an outsourcer of information technology, said that the hardware components incorporated in its systems came from an Asian Pacific supplier named "Hu Kares."

Selling to outsourcers presents a situation where name, reputation beyond the consistent ability to meet specifications, or even competitive edge in technological bells and whistles counts for nothing that will compel a margin that is much above cost. The only differentiation that is meangiful is the power to make a unique contribution to the outsourcers' profits. This requires the ability to lower the outsourcers' operating cost of their system or find a way to help them earn more revenues from it.

If an operating cost can be reduced, the outsourcers can make more money on their contract with the customer whose facility they are managing. Without raising their fee, they can make a higher margin. The added value contributed by the incremental margin is PIPpable as the basis for a supplier's own improved margin.

If operating performance can be increased, the outsourcers can benefit from the constructive addition of new capacity to the system. This may make the system more productive for the customer without having to ask for an added investment to enhance it: more work may be able to be processed or more goods may be produced for sale. This may allow the outsourcers to raise their fee based on the added value or to provide a greater gain in which they can share.

Enlarging a system's capacity may also permit the outsourcers to sell the incremental time or output to other customers and share in the gain with their customers. This expanded revenue stream is PIPpable for its improved profits.

PIPping outsourcers follows the basic Consultative Selling strategies of reducing operating costs and increasing revenue inflows. Because product is irrelevant, no other strategy can command margin. In the outsourcers' frame of reference, where all products are equal and all sources of supply are opaque to their customers, margin must come from contribution to outsourcer profit rather than contribution to performance. Any unique performance benefit over and above specification has no intrinsic worth unless it can be PIPped as a profit improver.

Because outsourcing can be highly intensive in capital and labor, it is tempting to think of its practitioners as traditional managers of processes and facilities. But outsourcing is essentially a financial service business; its principal capital is financial capital. Outsourcers must therefore be sold to on the basis of bottom-line profits from savings on their committed investments or top-line income from new and unexpected revenues.

If you sell to Original Equipment Manufacturers (OEMs), you have a two-pronged sales mission. First, you must sell an OEM to incorporate your product as a component in its equipment. Then you must counsel the OEM how to maximize the value your product adds to its equipment by realizing improved profits from its sales.

For a process control manufacturer, a PIP's "what-ifs?" could include these benefit categories:

• Reduced time costs by shorter installation time, reduced production costs by requiring less labor for installation, and reduced downtime costs due to simplicity of construction.

• Increased revenue opportunity from high-margin sales by the ability to offer customers lower maintenance costs, improved yield, reduced scrap as a result of more precise control that increases the amount of marketable product, and enhanced quality.

In order to help OEMs maximize the benefits of your process controls when they sell their equipment to end-users, you can pre-PIP the OEMs' sales by what-ifs? in categories like these:

• Saves end-user energy costs by maintaining uniform temperatures, reduces environmental penalties, saves rework costs, and saves on space utilization.

• In the revenue area, gets more of an end-user's marketable product shipped and billed faster and provides premium-price opportunity based on standardized quality of an end-user's products.