What happens when a client wants to sign on for one year and pay equipment costs at three-year rates? How do decades-old clients approach contract renewal? What is the real reason why manufacturing clients are cautious about signing two or three year contracts? Amit Salunke, CEO & Director, Sumeet Group Enterprises has all the answers.
30 years of annual contracts
There have been clients who have stayed with us for the past 30 years – ever since the company was founded – but renewal of our contracts with them happens on a year-to-year basis. Even such long term manufacturing clients do not opt for long term contracts; at the most, they will opt for two years. They prefer doing renewal on an annual basis because they feel that they should review our performance on an annual basis, despite our long relationship.
If we are bidding for an RFP (Request For Proposal) or an RFQ (Request For Quote), it becomes a three to five year contract at the most. The IT or auto sectors will still choose service stability by going in for five year contracts, but manufacturing clients tend to have a different attitude. They are wary of labour issues which may crop up and affect their business operations, and prefer not to rely on just one service provider. With a shorter contract period, they may prefer to terminate a contract, should labor issues arise.
A for Amortisation
For short term contracts, the machinery cost is also amortised for a shorter period; with this, equipment charges for the client become prohibitively high. Some clients convince us that though it will be a one-year contract initially, they will go in for an extension later. It is a matter of trust between the client and us; we then amortise the equipment over 2-3 years, even though they have signed on for just one year.
If the renewal doesn’t happen, we do feel the pinch. Although we can deploy the machinery at another site, the ROI for that particular contact is definitely affected. If the contract is for at least 2-3 years, our ROI is more protected.
Frequent changing of service partners affects clients too; every time new manpower comes in, they need to be trained again, which is an extra cost to the client as well.
When vying for such contracts, there are various levels of presentations and business development activities that we have to go through; only then can we be part of the bigger RFPs that are there in manufacturing facility management. Our sales team gives capability presentations on how we can offer the best possible services.
Once we receive the RFP invitation, we become part of a reverse auction. If we are at the lowest bid, we win the contract. From quality to cost, everything is analysed properly, and only then is such a contract awarded to the right service provider. We have won many such contracts.
A lot of hard work goes into such client acquisition; the effort required is very high. Like all good things, RFPs take time, but the reward is a longer term contract.