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Adrian Taggart, in his book Project Management for Supplier Organizations raises one of the key commercial issues for these businesses. How do you measure the value of potential future business when a client is dangling this in front of you as a means to encourage you to provide initial services free or at a discounted rate?

The objective of the Supplier Organization is to make money by delivering contracts at a profit.

A straightforward interpretation of this will always have the Supplier Organization pursuing the most profitable work. This is a good philosophy to adopt but there are other considerations.

As we have discussed, unlike Owner Organization project teams, Supplier Organizations are almost always permanent organizations. They seek to make money today, but also money tomorrow, on future contracts, so it can be appropriate to sacrifice short-term profit for the prospect of a larger long-term profit. Consider the following:

  1. An Owner Organization may be prepared to work in partnership with a Supplier Organization to develop new products or techniques that may subsequently provide the Supplier Organization with significant sales opportunities.
  2. Although an individual contract may not offer much by way of profit, it may provide an opportunity for the Supplier Organization to become an ‘approved supplier’ to an Owner Organization, which will entitle it to bid for future, perhaps more lucrative, contracts offered by the Owner Organization.
  3. An Owner Organization may be based in another country and an individual contract may provide an opportunity for the Supplier Organization to establish a presence and reputation in that country.

Ultimately, commercial organizations must speculate to accumulate and undoubtedly there are instances when each of the examples offered above would justify a small (or even negative) profit margin. This would be of particular relevance if securing access to new products or markets in question was part of the overall commercial strategy of the Supplier Organization.

However, very great care is warranted here. The promise of ‘jam tomorrow’ has been responsible for very many significant losses on behalf of suppliers and any Supplier Organization sacrificing short-term profit for the promise of a future, unquantifiable benefit is advised to proceed with great caution.

Source: Project Management for Supplier Organizations, Adrian Taggart, Gower Publishing, Farnham, 2015.

How does your organization address this issue? Do you have any hard and fast rules that work? Share them with us onwww.gpmfirst.com and read Adrian’s book online.