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Large Contracts - are we lost at sea?


    I am taking a break up in lakes in the Adirondacks – watching small sailboats and forgetting for a while Larry and his yachts. So I want to take a more micro view of enterprise software and think about those areas of enterprise automation that have missed the boat.
    Last week I spoke to a large business process outsourcer and they had an issue managing the margins they were making on some of their largest contracts. From the point of view of billing, cost management of services, supply chain management, resource planning – everything was under control. Costs and revenues are known – so all the information to calculate margins is there.
    The issue is how the information is organized – and it boils down to the real issue: for large enterprise contracts you bill your customers according to how they want to be billed not according to how much it costs you to supply the service. Only if you are lucky enough (maybe lucky is the wrong word) to negotiate a cost plus contract (buying by the units that have direct costs), will the bills you send out be a good indicator of profitability. But bills often mask the real costs with creative discounts, all you can eat plans (that magically assume zero marginal costs), multi-year fixed prices and ratcheted commitments and SLAs. Obviously, marketing and sales are given guidelines on what makes a profitable deal – but by just looking at the bill there is no way of saying how profitable the deal is (much less “when” it is profitable over lifetime of the contract and as consumption patterns change.
    The General Ledger – if organized on a per contract basis – so that everything purchased and everything billed rolled up to the contract might be a good source of profitability. But finance never likes its books cluttered with customer level cost sub-accounts. 
    This leaves Business Intelligence. In other words: set up BI to capture all information from ERP and Billing and use the intelligence of business information to associate costs and revenues. There are two fundamental issues. One, the purchasing systems don’t record in enough detail why something was purchased to be able to associate it to the revenue it “produces”. If a company rents a million dollars of Cloud storage – how does it know that 20% of it is being used on demand for three large US Government contracts? Two, BI does allow users to code in allocation logic but to do so for every contract is too onerous and the logic stays too high level and more worryingly too static: it takes a BI analyst to re-organize the “joins” whenever contractual arrangements change. This is OK if contracts are cookie cutter – and one change in BI can be re-used across many deals – but this will never be true in a buyer’s market.
    The real issue is unless businesses only sell to consumers – the internal supply / value chain is too dynamic and “multi-step” for margin solutions based on accounting or BI. Add in multi-national issues with transfer pricing and life becomes difficult. I would say that assuring margins on contracts remains almost an pseudo-actuarial game – where sales are asked to keep enough headroom on prices to ensure profitability. Or as I see quite often – they can’t – and the deal becomes “strategic”.
    The solution seems simple – why not bill internally? It makes sense. But if it costs so much to automate and configure bills to external parties – how can it be economic to bill internally where the business environment is seemingly even more dynamic? I think internal billing is sorely needed – 1) making it easy to 1) set up and evolve internal contracts, 2) exporting this information in “bills”, and 3) supplying this to BI and Accounting will be the key. A regatta of 32 footers – not America’s Cup behemouths.
    Douglas Zone
    About Douglas Zone Douglas Zone works as Special Projects at Cable & Wireless
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