Be Wary of Relaxing
The idea that businesses that offer customers small, but critically important products or solutions benefit from superior economics was one that hit home with many of you, so I think that lends it credibility. I heard from Joe R., for example, who was once CFO of a semiconductor fab. He said that while he was constantly on the lookout for cost savings, he never dreamed about not buying filters from Entegris because it wasn’t worth the risk of screwing up the entire manufacturing process in order to save a few hundred dollars per week. So Entegris charged them whatever they wanted, which helps explain that company’s very healthy 40% gross margins.
Spencer, another CFO, agreed 100% with the idea of small, but important suppliers, but pointed out how many vendors try to get away with acting like they are small, but important even when they’re not, calling out Cintas and Waste Management specifically. If you’re not paying attention, he said, these guys will try to increase prices and auto renew their services to no end, so “know your contracts and costs, and be wary of relaxing!”
And that’s good advice.
Indeed, if you’re a small business, or really anyone with a budget, it’s important to keep an organized and shared list of anything you pay for with a renewal tied to it, such as leases and service agreements, including calendar alerts for key dates or events. This is to ensure that you don’t inadvertently become a forced actor when it comes to renewing or canceling said contracts (because I can say from experience that landlords in particular love it when a tenant forgets about a renewal option).
Which brings up a broader point…
I’ve said before that I don’t believe business is a zero sum game, but it is competitive and actors aren’t benevolent (nor should they be). Further, that advantages are both relative and fleeting, so you need to press them when you have them. A corollary is that if you are to be successful in business given those circumstances, you need to be ruthless about avoiding errors of omission that turn a supplier, customer, employee, or other stakeholder into something they’re not. For example, if you forget to renew the lease on your warehouse after a few years where rents have been rising faster than, you’re going to find yourself behind the proverbial eight ball with regards to negotiating new terms since your business probably isn’t prepared to move and what happens as a result might change the entire economics of your business.
In other words, and I really can’t put it any better, “know your contracts and costs, and be wary of relaxing.”
– Tim