top 7 ways to overpay vendors

8/8/2019 Top 7 Ways to Overpay Vendors

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Berlin PacificVendor Management 212-247-2502 [email protected]

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You may be asking "Is this a mistake? A white paper that outlines ways to overpayvendors?!"

This is no mistake. Midsize firms routinely overpay their Telecom vendors by 100%, IT

maintenance contracts by 25-100%, Credit Card processing 10-50%, Waste and Recycling 15-40%, etc. With so many firms that continue to just hand over that kind of free money to vendors,

we thought it would be fun to come up with some helpful hints to ensure that you continue to

throw your company's hard earned money away, and to keep those vendors coming back for

more. (We are also including an alternative, more sensible path you should take for each; just incase you don't want to overpay!)

Before discussing the foolproof techniques you can employ to overpay (and avoid overpaying)

your vendors, let's look at the consequences of paying more than you should:

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Since increasing profits and freeing up money for new projects is one of the top goals of anyorganization, overpaying vendors is a great way to subtly ensure you lag behind yourcompetitors or help hobble a non-profits mission.

Profit Margins Suffer- a firm with a 10% profit margin that decreases the profit marginto 9% sees a 10% decrease in profits. A similar result would require a 10% fall in sales.

Firms Suffer. Firms with lower profit margins naturally tend to lag behind their

competitors and even go out of business. By contrast firms with the largest profit marginsnot surprisingly tend to last the longest, withstand downturns, and attract investors like

the legendary philanthropist John Templeton.

Productivity Suffers. There are opportunity costs - you can't spend the money on other

projects. For instance many IT departments can spend 70% of their budget on

entitlements, maintaining existing infrastructure. Increasing that number drasticallyreduces the opportunity to for completing new projects.

Less Career opportunity. Decision makers, who don't share organizational goals of

increasing profits and/or freeing up money for new projects, tend to have fewer careeropportunities at their current or new organization.

These 7 shortcuts will help put you, and keep you, on the fast track to spending way more

than you need to. It is entirely possible to spend twoor threetimes the amount you need

for Telecom services, which is a top 5 expense at many firms. Imagine doing this for allvendor costs! These overpaying shortcuts are easy to implement and guaranteed to keep

your vendors happy, and coming back for more:


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One of the easiest ways to overpay is to assume that none of the primary ways of overpayingapply to you. These primary ways are:

Buying things you don't need

Paying for things that are no longer being delivered

Paying higher prices than your competitors

Approving bills with billing errors

Something called "The Grandfather Clause" will also really help you overpay here: many

organizations simply assume that what was paid in the past was a good value, so therefore it is

still valid today. This simple leap of logic is usually hard to detect.

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One of the best ways to overpay is to rely on bad information that obfuscates whether youreoverpaying or not, and makes it too time consuming for anyone suspicious to determine either

way. Specifically, assuming your vendor data or other internal data will automatically provide

actionable ways to reduce overpayments is an easy way to overpay. Few vendors will tell you

when youre paying a higher price than you have to, or that youre buying things you dont needor receive, or that you under-utilize. This makes it easy to overpay. Often vendors will provide

papers bills, and will not provide detailed electronic information that easily provides visibility

into costs.

An Alternative Path You Should Take

Be open to the idea that you may be overpaying or buying things you dont need or arent

actually receiving. Routinely ensure you examine the detailsof what youre buying and thecontractual terms to make sure purchases are aligned with the currentneeds of the business

and the best market prices. Lookout for items that are not adding value because they arent:

Being used at all

Fully utilized

Being delivered

Be open to learning about better pricing and more cost effective solutions. If this sounds like

a lot of work. don't worry. Well talk more about making this easy later.


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If your internal and vendor information tells you that in aggregateyour money buys services that

serve the business, theres no way to tell which of your individual services are overpriced or no

longer serve a business need. If you want to overpay, don't do one-to-one correlations. Thiswould make the connection between costs and value clear. Many firms that overpay rely instead

on the following logic:

This is a great way to overpay. A vague pool of services is paid by a bunch of bills and theservices in general keep the business running. This has the added advantage of being completely

true. Anyone foolish enough to stop paying the bills would discover key services would be shutoff and the business would grind to a halt.


If your vendor and internal data accurately illustrates detailed information linking individual

servicesto their prices and how they add value by serving specific business needs, you will

have the ability know exactly what youre overpaying for. The good news is, it is unlikelyanyone will have put in a system similar to the following diagram:


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An Alternative Path You Should Take (Cont.)

If you dont want to overpay we suggest you start requesting and expecting data to be

provided in a structured form that gives you visibility in to costs. If you dont ask for

something the odds are much higher you wont get it. Well talk more in the next section

about how busy decision makers can do this.

It should also be noted that some data will need to be internally generated, in particular

mapping services to business needs. However, doing this in a clever manner will allow ITand you to join internal data with vendor data to create an accurate snapshot.


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One of the best ways to overpay is to be too busy to deal with the problem and to not delegate it

to anyone else. Empowerment failures are a great way for any organization to keep things from

getting things done.

Remember, delegation is something that rich people do to make more money. Whether youre

rich and lazy or rich and very busy, you rely on other people to take care of things for you. HenryFord and John D. Rockefeller didnt have time to become experts on everything. Instead they

hired people smarter than them to figure out how to solve problems, and spent their time finding

other things for people to do that would increase profits and make them richer.

Whatever you do, dont permit or request your subordinates, vendors, or especially an outsideconsultant, to give you clear actionable insight in to your costs. If you must permit them to do so,

do not give vendors or subordinates clear guidance on what information is needed or missing, orpermit them to revise their work. If any needed information is internal dont permit anyone to

gather it.

Let everyone know youre too busy to deal with it.


A key way to avoid overpaying is clever delegation. Make it clear what you need to knowand how it should be presented clearly. Help people understand what you want and let them

get it for you. Work with people who can give you the information you need and canexecute.

The less time you spend researching and executing decisions, the more time youll have tomake decisions. This implies of course that you properly delegate the research and execution

to others and dont permit shoddy research and execution. When properly done youll have

clear proposals on your desk to save substantial sums of money and theyll only require afew minutes of your time to review and approve execution.


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4. Dont Investigate or Revisit Assumptions

If you want to overpay it helps to never investigate or revisit the assumption that the bills being

paid are for services that are still being used and that the price negotiated is still the best one outthere. If a senior manager presses you to look in to cost savings, use handy excuses likeIt is

under contract., or "were locked into those costs through next year". They probably wont think

to look at the details of the contract, and if they do they hopefully wont understand theprovisions that arent being taken advantage of, or be able to easily compare it with the bill.

Youll probably be off the hook...for now.

For example, while overpaying for unused items that are piling up in a warehouse generally cantlast forever, paying for expensive services like toll-free numbers for ex-employees home offices

and phone lines that are never used can literally go on forever.


Remember the Grandfather Clause. The firm may be overpaying for services well after

youve left the firm. It definitely pays to have someone every so often double check thatwhat is being paid is actually being used and that prices havent fallen.

Example:

Many clients are under contract, however the language varies from client to client.

One client had a contract to buy a certain amount of a specific service each month.The client wasnt using the service, yet still had to pay for it. They were buying thesame service from another provider at a slightly higher price. When we showed them

what was happening, they stopped using the more expensive provider and started

using the service they had to buy anyway.

Another client had a volume commitment contract to spend a minimum amount each

year. They were spending well above the minimum. We helped them remove unusedservices and get better pricing on services which were overpriced, while keeping

spending above the minimum to avoid penalties.


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This is a classic way to overpay your vendors. If you want to overpay, the last thing you want is

for someone to call to your attention that goods and services exist that you are no longer usingand that a bidding war has led to a new contract proposal with rock-bottom prices. Youre

probably wondering What do I do now? Surely I wont keep overpaying now! Dont worry

there is still hope...

Even if you went ahead and approved the removal of unused services and signed and faxed back

the new contract with rock-bottom prices, chances are you'll still be overpaying your vendors.

How, you ask? Because theres a very good chance that next months bill will still have most ofthe old pricing and the old services!

You know through experience that this is actually very common. Remember, while vendors

know someone will get suspicious if there are no deliverables, vendors have no particularincentive to charge you less money for them!


Have a tracking system in place for changes that will affect your bill. Be able to anticipate

what the charges on your bill will look like. Red-flag any bill. If you have a standingpurchase order, review and update the purchase order as necessary.

When signing a new contract make sure someone also tracks and anticipates how changes in

pricing affect your bill. Go over the new bills with your vendor's account executive. Makesure they know ahead of time youll be doing this and that you also expect them to point out

the errors theyre going to fix. Make sure your internal team members check the bills and

track errors and resolutions.

Remember to delegate and demand quality and timely information from your staff members

and vendors.


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Being closed off to new sources of information is a great way to keep overpaying. If anyone

offers to investigate your current situation, go ahead and turn them down. If someone calls

saying he can probably get youbetter pricing, dont let him provide fresh, updated quotes for theproducts you buy. Instead, allow him to send you meaningless marketing material and dont ask

him for the critical product and service information you really need to know.


This ties in with getting good information and delegating properly. Someone who is good at

both is always willing to receive new ideas, and will help make sure the ideas are presentedclearly and in a manner that is easy to digest.

Example:

A firms sales rep e-mailed us claiming to have great rates on Verizon plans with no

contract. Instead of ignoring the e-mail or hitting the spam button, we called them.

We ran their numbers against the numbers wed seen at other firms. Their numberswere great; so great they became our new standard in helping our clients with

pricing on cell plans.


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Most people assume that billing errors are the top reason for overpayment. In reality most

overpayments come from paying more than you have to, or buying goods and services no longerneeded. The shortcuts described earlier are far harder to detect and therefore a much more

effective method of overpaying your vendors.

Assuming the bill is correct without checking it is actually a little too obvious. Most firms worry

about billing errors and have multiple people who actually find and eliminate them, e.g.

accountants, auditors, accounts payable, etc. Since firms actually have controls in place to stop

this sort of thing, accepting blatant overcharges shows a lack of imagination and a focus on shortterm results. Long term overpayment requires a long term solution. Short term thinking also puts

the onus on the vendor to ask for overpayments, instead of pro-actively taking responsibility foroverpaying.

We therefore cant recommend this shortcutto be as effective as the other six.


Checking and validating bills is an appropriate and key first step down the proper path.However, this alone is not enough to prevent overpayment. .


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Do you want to continue to overpay your vendors? If the answer is "Yes", then make sure you

don't know what you're paying for. Stay vague and uninformed. An even more effectiveapproach is to have absolutely no idea what your total spend is! Readily accept the information

your vendors give you. If your bills do not actually outline and explain what you're buying, it

makes it much easier and convenient for you to overpay them.

Also, don't regularly verify that you're still using the services you pay for. Simply assume you're

getting the best deal.

Assume you're doing the best job possible. Don't have anything to back this up with. Don't be

open to third party evidence or assistance. In summary, just let the overpayment continue to

happen, and let your vendors reap the rewards while your firm suffers the consequences.

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Don't assume anything.

Berlin Pacific has the experience and history of success managing vendors costs and contractsfor all Telecom related services and most IT services and solutions, and can help you ensure that

you are paying for the products and services you need, and at the price points you deserve.

Our Subject Matter Experts can help manage vendor costs as diverse as:

Credit card / payment processing, Financial Printing, Freight and shipping, (especially LTL), Tax

credits (for new employees and/or your location), Private Jets (maintenance and management),

Waste and Recycling (GreenReverse Logistics), Utilities, Inventory.

Give us a call today at 212-247-2502.


As the customer, you are the one defining your needs and outlining what are and are not

acceptable terms with your vendors. Sure, it can take a fair amount of time and resources todo this effectively. But what is the cost of not doing it the right way? We understand you

may not have the time, expertise, available staff, tools or skills to get control of your vendor

costs. We recommend doing what rich people do. Delegate. Let someone else to do the

work.

top 7 ways to overpay vendors

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