Tomicide Solutions, February 2010

Quantifying IT Solutions For Optimum Value Pricing

By Tom "Bald Dog" Varjan

Podcast version: MP3 Version. Right click the link and click "Save As".

Many years ago Henry David Thoreau said...

"For every thousand hacking at the leaves of evil, there is only one hacking the roots."

In terms of leaves and roots, this month I'd like to discuss with you how IT companies diagnose their clients' problems, and how they those present solutions to those problems.

And now we're back to Thoreau. Using his words, most IT companies are hacking at the leaves, that is, hammering their buyers mainly with technical features and sometimes with technical benefits.

They totally forget about hacking at the roots, that is, diagnosing the business problems caused by technology, and presenting business solutions.

All in all, communicating with real buyers (not purchasing agents) in business English that they understood in the boardroom, and not in techie English which only geeks understand in the server room.

This little error is costing IT companies a small fortune.

While buyers drive luxury cars and drink premium-priced bottled water and coffee, they buy IT solutions by the pound. Probably no other industry has been commoditised as badly in the last 10-15 years as information technology.

And many IT companies blame the market for being cheap.

But what has the IT industry in general done over the years to better communicate the value of their products and services? Not much really.

Yes, they've spent billions of dollars of venture capital on advertising technical features and benefits, but have fallen mighty short of communicating their stuff as business solutions. It's like McDonald's advertising cattle not Big Macs.

People want the Big Mac, but the cattle is the means to the end.

So, the better IT companies become at marketing the ends (business improvement), the better chance they have to sell the means (technology).

So, this month we're looking at how to better quantify buyers' situations, so the fee/price of solutions you sell are in line with the magnitude of the problem clients want to eliminate or the opportunity clients want to seize.

From Lipstick To Hope

Charles Revson, the founder of Revlon, was fond of saying...

"In the factory we manufacture lipstick, in the store we sell hope."

Similarly, in your offices, labs and workshops you do IT, but in your clients' boardrooms, you must sell business solutions.

I've never cared much for jewellery, but I've read somewhere that the price of a piece of diamond has something to do with the number of facets on it.

So, I use this analogy here to discuss the value of IT solutions.

Causes and Effects In Information Technology

Let's say your buyer - a manufacturing company - experiences excessive system crashes. More and more people are murmuring and complaining about the dodgy IT infrastructure. Computer operators are frustrated, and there is more and more downtime on the computer system that controls the production machinery system.

Let's say, your buyer invites you and one of your competitors, Bodacious Byte Bashing Ltd., to bid on an IT infrastructure upgrade project.

There is is a good chance that the Byte Bashers respond to the vague RFP with some fiendish technical solution.

You decide to go a different route, and request a meeting with all key people to diagnose the situation. Let's say, your buyer is not a moron, so he's willing to gather the executives, including the COO and CIO, to go to the bottom of the problem.

So the basic symptom the client experiences is excessive system crashes and the need to restart the system as many as 2-3 times a day.

At this point, most IT companies jump to the solution, but we know that solutions are useless until and unless buyers understand the problem and the implications of the problems.

So, let's manage the situation from the middle, and then from north to south, starting with...

One more important point.

You have to facilitate this diagnosis. It means that assign someone to write the numbers on the white board and ask everyone to take copious notes and use their calculators.

Don't calculate the numbers FOR them. Let them do it for themselves. They have to see as the financial impact unfolds under their fingers as they keying in the numbers.

You try to create a connection to the impact using...

An auditory connection: You speak the numbers.

A visual connection: You have the numbers on the white board for all to see.

A kinaesthetic connection: Everyone punches the numbers and writes them down in her own notebook.

This way the results sink in.

Step 1: Clarifying The Experienced Symptom

This is where we outline the symptom the client experiences right now.

The mistake many IT companies make is that they talk about their solution and the improved situation or the root causes that drive the symptom. The problem with the former is that it's in the future and clients can't relate to it. And the problem with the latter is that they are not obvious to clients.

This is why we have to start with the symptom that they experience.

When patients tell their doctors that they have numb lower jaws, doctors know that it can be a symptom of a potential heart attack waiting. Not sure yet, but it's one pointer.

And at that point doctors don't talk about myocardial infarction because it's meaningless to patients. They talk about the numb jaw. That's an obvious symptom.

Step 2: Discovering The Business Problems The Symptom Causes

At this point we want to discover the effects the symptom creates and work our way backwards to the root causes.

So, let's start with Hard Indicators or Hard Effects, because they are fairly easy to quantify.

Seller: "So the basic symptom is that your company suffers from excessive system crashes, and the system has to be restarted as many as 2-3 times a day."
Buyer: "Correct."

Then you start building the facets of the diamond. The facets are the value components of your solution.

Seller: "How does this repetitive restart problem impact your company?"

Facet #1

Buyer: "Our people get frustrated, and the best ones leave us for the competition."
Seller: "How many people are impacted on an annual basis?"
Buyer: "12."
Seller: "What is the combined gross annual compensation of these people?"
Buyer: "$480,000."
Seller: "And we know from various HR studies that replacing frontline employees costs about 2-3 times of their gross compensation. So, being conservative, we're at an annual $1 million?"
Buyer: "So, being conservative, we're at an annual $1 million?"

Impact #1: $1,000,000

Seller: "Other impacts?"

Facet #2

Buyer: "Frustrated employees stay home sick even when not sick. Our medical costs are skyrocketing."
Seller: "What is your company's normal annual sick leave rate?"
Buyer: "About 220 days. Every year about 220 person days are lost."
Seller: "What is your company's increased annual sick leave rate as a result of this problem?"
Buyer: "About 700 days. Every year about 700 person days are lost."
Seller: "What is the combined lost productivity?"
Buyer: "About $1,400,000 every year is lost."
Seller: "What is the medical cost of those 700 days?"
Buyer: "About $250,000 per year."

Impact #2: $1,650,000

Seller: "Other impacts?"

Facet #3

Buyer: "Production downtime."
Seller: "What is your company's hourly production capability?"
Buyer: "About $35,000."
Seller: "What is the daily downtime?"
Buyer: "About 1.5 hours a day."
Seller: "Does it happen every day?"
Buyer: "Yes."
Seller: "What does it add up to annually?"
Buyer: "It's 35,000 (per hour) x 1.5 (daily downtime) x 200 (working days) = 10,500,000."

Impact #3: $10,500,000

Seller: "Other impacts?"

Facet #4

Buyer: "Increased management attention on an issue that should work (managers fall behind on their normal work)?"
Seller: "How many managers are impacted?"
Buyer: "11."
Seller: "What is their combined annual compensation?"
Buyer: "$950,000."
Seller: "What percentage of their time is spent on this problem?"
Buyer: "Some 25%?"
Seller: "So, a conservative $237,000 annually."
Buyer: "Yes."

Impact #4: $237,000

Seller: "Other impacts?"

Facet #5

Buyer: "Delays in order deliveries."
Seller: "Causing...?"
Buyer: "Increased client attrition and negative word of mouth?"
Seller: "What's your normal client attrition?"
Buyer: "About 10% per year"
Seller: "How many clients"
Buyer: "23 clients."
Seller: "How much does the average client spend on your stuff annually?"
Buyer: "$17,000."
Seller: "And how many years does she stay with you?"
Buyer: "5-7 years"
Seller: "What's the increased client attrition?"
Buyer: "About 30% per year"
Seller: "So, let's see the calculation…"
Buyer: "$17,000 for 69 clients over 6 years. That's 7,038,000 per year."

Impact #5: $7,038,000

Seller: "Other impacts?"

And this way open up each and every impact point and turn it into a value component.

Let's add up all 5 impacts, and we have a combined annual cost of problem of $13,624,000. This is the problem your knowledge (not the things you sell) addresses. Counting with 2,000 working hours a year, this is a $6,812 per hour problem.

To the financial impact you can add the Soft Indicators or Soft Effects, because they are harder to quantify.

Step 3: What Are The Consequences Of Ignoring The Problem?

Here you can take the cost of the problem to 2-5 years, and again, add them all up.

And this impacts soft indicators too. In year #1 it may be just a little dent in the company's reputation in the community, but by year #3 the company becomes a laughing stock.

I bet General Motors' problems started a long time ago, and the ignorance of the problem has lead to the point of GM becoming a subject for industrial ridicule.

Step 4: What's The Traditional Solution (Which Usually Doesn't Work)

As human beings we are cure-focused not prevention-focused. Using the words of Ron Baker, the founder of the Verasage Institute, most of your clients make their roasts with the help of their smoke detectors. Most actions companies take are remedial. It's like admiring the photograph and ignoring the X-ray that shows advanced cancer.

Step 5: Why The Traditional Solution Doesn't Work?

Here you can say that the traditional solutions are crafted around symptoms not real problems. It's usually caused by aimless rush in the client's company, so the key people you want to talk to are too busy to see you.

IT companies craft solutions based on partial information.

Step 6: Why Hasn't The Problem Been Solved Yet?

Very often this is politics or the purchasing department's "effort" to find a competitive(ly cheap) sucker to solve the problem. Also, because IT folks can keep quiet about the problem, so the executives don't even realise what's happening.

Step 7: What Can Be Achieved By Solving The Problem?

Here turn around the problem. Stipulate the costs savings and the elimination of the negative soft effects.

Step 8: What Is The Client's Ideal Solution?

Ask your buyer to describe the perfect solution in great detail. How should the business operate without the above mentioned business problems. Still keep quiet about technology. It's still a business conversation.

Step 9: How Do You Solve The Problem?

And here you can go into your hypotheses about what can cause these symptoms and effects. Remember, so far you've been talking business not technology.

Here you can say that these problems are often caused by...

Step 10: What Do You Really Need To Do?

And here you can suggest that the client retains you to diagnose the system and check its vital signs.

This can be a short and inexpensive (NOT cheap!) project, during which you check the whole system and document your findings.

This is vital. This is where your competitors try to carve out a large, long and juicy project that raises instant suspicion. But you can say...

"We've never worked together. I suggest that we start small, if we don't enjoy working together, after this initial 'get to know each other' project we can part company in peace."

This sentence alone is a huge trust-builder.

It also shows that you're selective too, so may it's you who may decide not to do any more work with this client.

Then in your findings, you outline the problems you've found and outline your course of action to cure the system if you get hired.

Yes, the buyer may decide to hire someone else to do the work based on your diagnostic report, but it's highly unlikely.

Your diagnosis has built enough trust, and buyers know that by this point you know their systems inside out.

On Summary

This diagnosis bit is not that hard if you have prepared for it, and know the impact of the solutions your company sells. So, you can arrive at the meeting with the key players with your diagnostic sheet and ask relevant questions.

In our example we went from a seemingly innocent system rebooting problem in the server room to a $13 million a year crisis in the boardroom.

Your client doesn't know that the full cost of his company's problem is $13 million per year. The ingredients of this figure don't show up in cashflow statements and balance sheets. But they're there.

So, this is what I suggest you do...

Take each of your products/services and write down the symptoms clients experience in the absence of this product/service. This symptom can be either technical or non-technical.

Then write down the possible technical causes of this symptom.

Finally, write down the business impacts of this symptom.

Then you can start quantifying the business impacts.

Every single technical problem has several business impacts. The better you can open up these business impacts, the more value your buyers perceive in your solutions, the more value your can capture and hence the more you can charge.

And please don't get hung up on how long it takes you to do the work or how much the materials cost you. What matters is the outcome.

When it comes to selling, Gill Wagner of Honest Selling (www.honestselling.com) has been one of my role models ever since I discovered him in 1998 at Consulting Tools, a forum for consultants.

I've been reading his writings ever since and when he published his book, "Honest Selling: How To Build The [Your Name Here] Sales System", I instantly bought it.

In this book, under section "Secret 2: Your Magic Wand", Gill gives the story of how he presented the value of his services to a home owner...

When I was 18 years old, I went on my first sales call ever. I was meeting with a homeowner who had a 1,200-square-foot cedar deck on the back of his house, and who needed some sunblock applied to the wood, so it wouldn't turn black. The deck was several years old, and it had been sealed a few times already, so the owner had a good handle on what the job would cost and how long it should take.
After negotiating the details of the job and my $500 fee ($150 for materials and $350 for labor, which was close to what he'd paid in the past), I handed my one-page contract and pen to the owner and asked him to sign it. He took the contract and my pen, put the contract on the rail of his deck and leaned over to sign, pausing with the tip of the pen only a quarter-inch from the signature line, as he read the contract.
After about 45 seconds of reading, he looked up and asked, "How long will this job take?"
I replied, "I'll spend the first four hours masking your house, sidewalks and everything else with tape and plastic, to avoid any spills and over-spray. Then it will take me about an hour to spray the deck with the first coat of sealer. The sealer you want needs an hour to dry between coats, so when I finish the first coat, I'll be able to start on the second coat, which will also take an hour. Cleanup and touch-up will take me another two hours or so, so I can get the whole job done in one day."
The owner quite angrily said, "But the last guy took two full days to seal the deck."
To which I replied, "That's probably because he used a brush. I'll be using an airless paint sprayer, which does a more thorough job and is much faster."
I've been selling for 25 years, and what occurred next is still the most obstinate and angry prospect reaction I've ever experienced. As soon as this guy heard I could finish in one day what others had taken two days to complete, he violently ripped up the contract, jammed the pen in my hand, pushed me off his deck, out his gate and into the alley, all the while raging, "There's no @$&%#!$ way I'm paying some punk kid $350 for one day's work!"
The lesson I learned that day is one of the most valuable lessons I've ever learned about sales, and has been a key to my success as a salesman throughout my career. When you own a magic wand - in my case, an airless paint sprayer; in your case, the wealth of knowledge and technology you bring to the table - you absolutely must tell the prospect about your wand before asking him or her to sign the contract.
In every deck-sealing sales call I had after the one above, before handing the contract to the prospect, I would say, "Now you know, you're paying me $500 to seal your deck, not for the time it takes me to do the job. So, as soon as you sign this contract, if I pull a magic wand out of my pocket, wave it and magically seal your deck, you still write me the check. Or, if it takes me three weeks at eight hours per day, it's still just $500. I'm pointing that out, because I want you to know that I actually own a magic wand, and I don't want you to be upset when I wave it, and your deck is magically sealed."
You have a magic wand - your wealth of experience, knowledge and tools - and if you'll only tell people you have a magic wand, you can overcome virtually all fear of the unknown that your prospects experience.

Obviously, this client was more concerned about the time the work took for Gill than the result he would derive from the completed work.

And we all bump into such clients from time to time. Yes, we can negotiate and hope for the best, but if we have a good lead generation system that gives us a steady stream of qualified sales leads, then we can move on without wasting our time and energy on inappropriate clients.

Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.