Marketing for project-oriented businesses
Winning new projects and programs requires highly specialized and disciplined team efforts among marketing, technical and operating personnel, plus significant customer involvement. The paper discusses the various management tools, methods and systems available for effectively pursuing and winning new project business. Topics include: identifying and analyzing new project opportunities; planning for growth; developing a specific contract opportunity and pricing.
Marketing A Project
To the realistic manager, project-oriented businesses represent a demand to be filled. However, its practices are substantially different from traditional product businesses. They require special skills, tools and techniques particularly for new business developments.
What Is Different?
Custom Design. Traditional businesses provide standard products and services for a variety of applications and customers. Projects, on the other hand, are custom-designed items to fit specific requirements of a single customer community.
Project Life Cycle. Project-oriented businesses have a start and an end. They are not self-perpetuating. Business must be generated on a project by project basis rather than by creating demand for a standard product or service.
Long Lead Times often exist between project definition, start-up and completion. On a large program, these phases can span over decades. A well publicized example is the NASA Space Shuttle which was conceptualized in 1965. R&D work started in 1967. The first test flight was made in 1977. The total program, however, will continue well into the 1990s.
Risks. Risks are present especially in the research, design and production of engineering programs. The program manager not only has to integrate the multidis-ciplinary tasks and program elements within budget and schedule constraints, but also has to manage inventions and the technology itself.
The Technical Capability to Perform is critical to the successful pursuit and acquisition of a new project or program.
A Systematic Effort is usually required to develop a new program lead into an actual contract. The program acquisition effort is often highly integrated with ongoing programs and involves key personnel from both the potential customer and performing organization.
With all these limitations, risks and problems, profits are usually very low by comparison to commercial business practices. One may wonder why companies pursue project businesses. Clearly, there are many reasons why projects and programs are good business:
- Although immediate profits as percentage of sales are usually small, the return on capital investment is often very attractive. Progress payment practices keep inventories and receivables to a minimum, enabling companies to undertake programs many times larger in value than the assets of the total company.
- Once the contract has been secured and is being managed properly, the program is of relatively low financial risk to the company. The company has little additional selling expenditure and a predictable market over the life-cycle of the program.
- Engineering program business must be viewed from a broader perspective than motivation for immediate profits. Engineering program business provides an opportunity to develop the company’s technical capabilities and build a technology and experience base for future business and growth.
- Winning one program contract often provides attractive growth potential such as (1) growth with the program via additions and changes, (2) follow-on work, (3) spare parts, maintenance and training, and (4) being able to compete effectively in the next program phase, such as growing a study program into a development and, finally, a production contract.
Taken together, new business is the lifeblood of an organization. It is especially crucial in project-oriented businesses which lack the ongoing nature of conventional markets.
New business developments are complex undertakings. The management of a new program acquisition is different from commercial marketing practices. It requires special skills, tools, techniques, and most importantly competent, experienced people from all parts of the organization, to carry the effort successfully through the various stages of acquisition planning, marketing, proposal development and contact negotiation. It is this fundamental set of management techniques which will be discussed in this paper. But first, let us define the market of the project-oriented business.
Defining the Market
Customers come in various forms and sizes. Particularly for large programs with multi-user groups, customer communities can be very large, complex and heterogeneous. Very large programs, such as military or aerospace undertakings, are often sponsored by thousands of key individuals representing the user community, procuring agencies, Congress and interest groups. Selling to such a diversified, heterogeneous customer is a true marketing challenge which requires a highly sophisticated and disciplined approach.
The first step in a new business development effort is to define the market to be pursued. The market segment for a new engineering program opportunity is normally in an area of relevant past experience, technical capability and customer involvement. Good marketeers in the program business have to think as product line managers. They have to understand all dimensions of the business they are in to define and pursue market objectives consistent with the technological capabilities of their organizations.
Market Predictability. Program businesses operate in an opportunity-driven market. It is a mistaken belief, however, that these markets are unpredictable and unmanageable. Market planning and strategizing is important. New program opportunities develop over periods of time, often measured in years for larger programs. These developments must be properly tracked and cultivated to form the bases for management actions such as (1) bid decisions, (2) resource commitment, (3) technical readiness, and (4) effective customer liaison.
The anatomy of winning new business is supported by systematic, disciplined approaches which are illustrated in Figure 1 and discussed in four basic steps:
- Identifying new business opportunities
- Developing a specific contract opportunity
- Developing the bid proposal
- Deciding the bid price
- Negotiating the contract
Identifying New Business Opportunities
Identifying a new program opportunity is a marketing job. At the initial stages one does not evaluate or pursue the opportunity. That comes later. Identifying new opportunities is, furthermore, an ongoing activity. It involves the scanning of the relevant market sector for new business. It is a function which should be performed by all members of the project team in addition to marketing support groups. There are many sources for identifying new business leads, such as:
- Customer meetings of ongoing programs
- Professional meetings and conventions
- Trade shows
- Trade journals
- Advertising your capabilities
- Personal contacts
All one can expect, at this point, is to learn of an established or potential customer requirement in one of the following categories:
- Follow-on to previous or current program
- Next phase program
- Additions or changes to ongoing programs
- New programs in your established market sector or area of technological strength
- New programs in related market
- Related programs, such as Training, Maintenance, or Spares
For most businesses, ongoing program activities are the best source of new opportunities. Not only are the lines of customer communication better than in a new market, but more importantly, your image as an experienced, reliable contractor has hopefully been established, a clear competitive advantage in any future business pursuit.
THE PHASES OF WINNING NEW CONTRACTS IN PROJECT-ORIENTED BUSINESSES FIGURE 1
Analyzing the New Opportunity
The target result of this analysis is an acquisition plan and bid decision. However, there are many steps of hard work required before the analysis is ready for submittal to a bid board. Although new business analyses come in various forms, they should contain at least the following elements:
- Start with a brief memo assessing the new business opportunity: requirements, scope, budgets, schedules, why it is good business. This is just a conversation piece to get further actions. One page will do.
- Find a sponsor. An organization which has the business charter and interest to pursue the new opportunity.
- Form an acquisition team of all the key personnel needed to analyze and develop the new opportunity. At this point, team members are often part-time, but they should represent all disciplines contained in the new opportunity. This effort requires competent people and good leadership. A good coordinator is helpful, but should not be substituted for a true leader. Someone must be in charge of this effort who has the respect of the people throughout the organization and can direct the activities.
- Determine and analyze the details of the new program opportunity in close liaison with your customer. Personal contacts are most important. Customer reports and plans are valuable sources of supplementary information; however, they should not be substituted for face-to-face discussions with customer personnel.
Analyzing the new opportunity and preparing the acquisition plan is an interactive effort, particularly within step four. Often there are many meetings between the customer and the performing organization needed before a clear picture of requirements against capabilities emerges. A major fringe benefit of proper customer contact is the potential for building confidence and credibility within the customer community. It shows that your organization understands the requirements and has the capability to perform. This is a necessary prerequisite for eventually negotiating the contract.
The analysis phase concludes with a preliminary acquisition plan. Often a set of short forms, such as shown in Figure 2, provides the standard format for documenting (1) Description of Opportunity, (2) Competitive Assessment, (3) Why should we Bid?, (4) Key Personnel and Responsibilities, (5) Action Plan, and (6) Resource Requirements. This preliminary acquisition plan provides the basis for the first formal bid decision and a detailed plan for the acquisition of the new business.
Planning for Growth
It is a mistaken belief that an acquisition plan is just a piece of paper needed to justify policy requirements or to pass a management gate. Although there is no guarantee that one will win a new program with proper acquisition planning, without it, it is a losing battle. It is like driving cross country without a map, probably even worse.
The purpose of an acquisition plan is two-fold; it provides:
- An assessment of the new program opportunity as a basis for appropriating resources for developing and bidding the new business
- A road map of the total acquisition effort with specific milestones against which progress can be measured and controlled
Typcially, the New Business Acquisition Plan should include the following elements:
- Brief Description of New Business Opportunity — Stating the requirements, specifications, scope, schedule, budget, customer organization and key decisionmakers.
- Why Should We Bid? — A perspective regarding establishing business plans, desirable results such as profits, markets, growth and technology.
- Competitive Assessment — Description of each competing firm regarding their past activities in the subject area, including (a) related experiences, (b) current contracts, (c) customer interfaces, (d) specific strengths and weaknesses, and (e) potential baseline approach.
- Critical Win Factors — Listing of specific factors important to winning the new program, including their rationale. (Example: Low implementation risk and short schedule important to customer because of need for equipment in two years.)
- Ability to Write a Winning Proposal — Addresses the specifics needed to prepare a winning proposal. This includes (a) availability of the right proposal personnel, (b) understanding of customer problem, (c) unique competitive advantage, (d) expected bid cost to be under customer budget, (e) special arrangements: teaming, license, model, (f) engineering readiness to write proposal, (g) ability to price competitively.
- Win Strategy — Chronological listing of critical milestones guiding the acquisition effort from its present position to winning the new program. It shows those activities critical for positioning yourself uniquely in the competitive field. It includes timing and responsible individuals for each milestone.
For example, if low implementation risk and short schedules are important to the customer, the summary of the win strategy may state;
- “Build credibility with the customer by introducing key personnel and discussing our baseline prior to RFP.”
- “Stress related experience on ABC Program.”
- “Guarantee 100 percent dedicated personnel. List program personnel by name.”
- “Submit detailed schedule with measurable milestones and specific reviews.”
- “Submit XYZ module with proposal for evaluation.”
- Capture Plan – A detailed action plan in support of the win strategy and all business plans. It should integrate the critical win factors and the specific action plan. All activities should have measurable milestones, timing, budgets, and responsible individuals identified. The capture plan is a working document to map out and guide the overall acquisition effort. It is a living document which should be revised and refined as the acquisition effort progresses.
- Ability to Perform Under Contract – This is often a separate document but a summary should be included in the acquisition plan stating (a) technical requirements, (b) manpower, (c) facilities, (d) teaming and subcontracting, and (e) program schedules.
- Problems and Risks – List of problems critical to the implementation of the capture plan, such as (a) risks to techniques, staffing, facilities, schedules or procurement, (b) customer-originated risks, (c) licenses/ patents/rights, and (d) contingency plan.
- Resource Plan – Summarizes the key personnel, support services, and other resources needed for capturing the new business. The bottom line of this plan is the total acquisition cost.
NEW BUSINESS ACQUISITION PLAN SUMMARY FORMS
There are many ways to present the acquisition plan. However, an established format which is accepted as a standard throughout the organization has several advantages. It provides a unified, standard format for quickly finding information during a review or analysis. Standard forms also serve as checklists. They force the planner to include not only information conveniently obtainable but also to seek out the other data necessary for winning the new business. Finally, a standard format provides a quick and easy assessment of the new opportunity for key decision makers. Examples of standard formats for new business acquisition plans are shown in Figure 2.
The Bid Board
Few decisions are more fundamental to new business than the bid decision. Resources for the pursuit of new business come from operating profits. These resources are scarce and should be carefully controlled. Bid boards are management gates for the release and control of these resources. The bid board is an expert panel usually convened by the General Manager to analyze the acquisition activities to determine status, and to assess the investment vs. opportunity to acquire new business. The acquisition plan provides the major framework for the meeting.
Major acquisitions require a series of bid board sessions, starting as early as 12 to 18 months prior to the RFP. Subsequent bid boards reaffirm the bid decision and update the acquisition plans. It is the responsibility of the Proposal Manager to gather and present the pertinent information in a manner that provides the bid board with complete information for analysis and decision. This requires significant preparation, including customer contact, engineering and IR&D work. A team presentation is effective. All disciplines must be involved. Typically, these include: (1) Proposal Manager; (2) Proposal Specialist; (3) Marketing Specialists; (4) Engineering Task Managers; (5) Operations Task Manager; and (6) Contracts Specialist.
Developing A Specific Contract Opportunity
We live in a competitive world. Winning new business requires significant homework in preparation for the bid proposal. Winning a new engineering program is often unique and different from selling in other markets. It often requires selling an organizational capability for a custom development. Something that has not been done before. This is different from selling an off-the-shelf product that can be examined prior to contract. It requires building credibility and confidence in the customer’s mind that your organization is the best candidate for the new program. Such a can-do image usually has four facets.
First: Significant Customer Contact
Customer liaison is vital to learn about the requirements and customer needs early. It is necessary to define the technical baseline, potential problem area and risks.
Establishing meaningful customer contact is no simple task. Today’s structured customer organizations involve many key decision-makers, conflicting requirements, biases and needs. There is rarely only one person who will sign off on a major procurement. Engineering and marketing involvement at all levels is necessary to reach all decision-making parties in the customer community. Your new business acquisition plan will be the roadmap for your marketing efforts. The benefits are that you
- Learn about the specific customer requirements.
- Obtain information for refining baseline prior to proposal.
- Can participate in customer problem solving.
- Build a favorable image of a competent, credible contractor.
- Check out your baseline approach and its acceptability prior to proposal.
- Develop rapport and good working relationship with customer
Second: Prior Relevant Experience
Nothing is more convincing to the customer than demonstrated prior performance in the same or related area of the new program. It shows the customer that you did produce on a similar task. This reduces the perceived technical risks and associated budget and schedule uncertainties. Therefore, it is of vital importance to demonstrate to the customer that your organization understands the new requirements and has satisfactorily performed on similar programs previously. This image of an experienced contractor can be communicated in many ways.
- Field demonstration of working systems and equipment.
- Listing of previous or current customers, their equipment and applications.
- Model demonstrations.
- Technical status presentations.
- Product promotional folder.
- Technical papers and articles.
- Trade show demonstrations and displays.
- Slide or video presentation of equipment in operation.
- Simulation of system or equipment.
- Printed specs, photos, or inputs/outputs of the proposed equipment or its parts.
Demonstrating prior experience to the customer is integrated and interactive with the customer liaison activities. To be successful, particularly on the larger programs, it requires both leadership and discipline. Start with a well-defined customer contact plan as part of your overall acquisition plan. It requires well planned engineering and marketing involvement at all levels to make these contacts with relevant personnel in the customer community. The benefits of these intensive marketing efforts are that you build a customer image of an experienced, sound contractor and learn at the same time more about the new program, its specific requirements, risks, concerns, and biases. All this will make it easier to respond effectively to a formal or informal request for proposal.
Third: Readiness to Perform
Once the basic requirement and specifications of the new program are known, it is often necessary to mount a substantial technical preproposal effort to advance the baseline design to a point which permits the clear definition of the new program. These efforts are sometimes funded by the customer or have to be borne by the contractor. Typical efforts include (1) feasibility studies, (2) system designs, (3) simulation, (4) design and testing of certain critical elements in the new equipment or the process, (5) prototype models, or (6) any other development necessary to bid the new job within the desired scope of technical and financial risks.
Why do organizations spend their resources for engineering developments prior to contract? True, it is expensive, has no guarantee of return and precludes the company from pursuing other activities. However, it is often an absolutely necessary cost for winning new business. These advance developments reduce the implementation risks to an acceptable level for both the customer and the contractor. Further, these developments might be necessary to catch up with a competitor or to convince the customer that certain alternative approaches are feasible.
Clearly, preproposal developments are costly. They should be well detailed and approved as part of the overall acquisition plan. The plans and specific results should be properly communicated to the customer. This will help to build a quality image and give the potential contractor additional insight into the detailed program requirements. Finally, one should not overlook two sources of funding for these “activities. First, to obtain customer funding for these advanced programs prior to contract. Often the customer is willing to fund contract definition activities because it may reduce the risks and uncertainties of contractual performance. Secondly, advanced developments can be funded as part of other ongoing engineering developments. The program manager might find that a similar effort is already underway elsewhere or that part of his needed effort is being worked on in a corporate research department or even within the customer organization.
Finally, it should be clear that preproposal engineering efforts are multifunctional programs. Therefore, we should provide the same leadership, discipline, and management tools as for any other multidisciplinary activity of its size.
Fourth: Establishing the Organization
Another element of credibility is the contractor’s organizational readiness to perform under contract. This includes the facilities, key personnel, support groups, and management structure. This is particularly critical for winning a large program, relative to company size. Often the contractor has to go out on the limb and establish a new program organization needed to satisfy specific program and customer requirements. This may require major organizational changes.
Few companies go into a reorganization lightly, especially not prior to contract. However, in most cases it is possible to establish all the elements of the new program organization without physically moving people or facilities or erecting new buildings. What is needed is an organization plan which details exactly how to proceed as soon as the contract is awarded. Further, the new program organization can be defined on paper together with its proper charter and all structural and authority relationships. This should be sufficient for customer discussion and will give a head-start once under contract. Usually it is not the move of partitions, people or facilities which takes the time, but determining where to move and how to establish the working relationship.
As a checklist, the following organizational components should be defined and discussed with the customer prior to a major new contract:
- Organizational Structure
- Policy/Management Guidelines
- Job Description
- Authority and Responsibility Relationships
- Type and Number of Offices and Laboratories
- Facilities Listing
- Floor Plans
- Staffing Plan
- Milestone Schedule and Budget for Reorganization
Seldom has a company to reorganize completely to accommodate a new program. It requires resources and risks for both the contractor and the customer. Most likely the customer and program requirements can be accommodated within the existing organization by redefining organizational relationships, authority and responsibility structures, without physically moving people and facilities. Matrix organizations in particular have the flexibility and capacity to handle large additional program business with only minor organizationsl changes.
Developing A Superior Proposal
Bid proposals are payoff vehicles. They are one of the final products of your marketing effort. Whether you recommend an engineering development to your Corporate management, complete for a Government contract, or bid on a commercial program, the process is the same. In the end, you have to submit a proposal.
On the other side, many senior managers point out that the proposal is only one part of your total marketing effort. The proposal is usually not the vehicle to sell your program. It is too late. The program concept, the soundness of its approach, alternatives, your credibility, etc., must have been sold during the face-to-face discussions with the customer. So, why this fuss about writing a superior proposal? Because we live in a competitive world. Your competition is working toward the same goal of winning this program. They, too, may have sold the customer on their approaches and capabilities. Hence, among the top contenders, the field is probably very closely focused. More importantly, beating most of the competition is not good enough. Like in a poker game, there are no second winners. Therefore, while it is correct that the proposal is only part of a total marketing effort, it must be a superior proposal. Proposal development is a serious business by itself.
Most people hate to work on proposals. Proposal development requires hard work and long hours, often in a constantly changing work environment. Proposals are multidisciplinary efforts of a special kind. But, like any other multifunctional program, they require an orderly and disciplined effort which relies on many special tools to integrate the various activities of developing a high-scoring quality proposal. This is particularly true for large program proposals which require large capital commitments. Smaller proposals can often be managed with less formality. However, at the minimum they should plan for the following tasks to ensure the development of a quality bid proposal:
- Proposal team organization
- Proposal schedule
- Categorical outline with writing assignments and page allocation
- Tone and emphasis/win strategy
- RFP analysis
- Technical baseline review
- Draft writing
- Art/illustration development
- Cost estimating
- Proposal production
- Final management review
For each activity or milestone the plan should define the responsible individual(s) and the timing.
There is little argument about the importance of the price tag to any proposal. The question is what price will win the job; and everyone has the opinion on this topic. The decision process that leads to the final price of your proposal is highly complex and has many uncertainties. Yet proposal managers, driven by the desire to win, often press for a low price without properly considering all associated factors. If our only business objective is to win the job, perhaps a very low priced proposal will help. But hopefully, winning is only the beginning. We have short- and long-range objectives, maybe on profit, market penetration or a new product development. These objectives may be incompatible or irrelevant to a per se low price strategy such as:
- A suspiciously low price, particularly in cost-plus type proposals might be perceived by the customer as unrealistic, affecting the bidder’s cost credibility or even his technical ability to perform.
- The bid price may be unnecessarily low relative to the competition and customer budget, therefore eroding profits
- The price may be irrelevant to the bid objective, such as entering a new market. Therefore, the contractor has to sell the proposal in a credible way, e.g., use cost sharing.
- Low pricing without market information is meaningless. The price level is always relative to (1) the competitive prices, (2) the customer budget, and (3) the bidder’s cost estimate.
- The bid proposal and its price may cover only part of the total program. The ability to win Phase II or follow-on business depends on Phase I performance and Phase II price.
- The financial objectives of the customer may be more complex than just finding the lowest bidder. They may include cost objectives for total system life cycle cost (LCC), for design to unit production cost (DTUPC), or for specific logistic support items. To present sound approaches for attaining these system cost performance parameters and targets may be equally or more important than a low bid for its development.
Further, it is refreshing to note that in spite of customer pressures toward low cost and fixed price, the lowest bidder is certainly not an automatic winner. Both commercial and governmental customers are increasingly concerned about cost realism and ability to perform under contract. A compliant, sound technical proposal, based on past experience, with realistic well documented cost figures, is often chosen over the lowest bidder who projects a risky image regarding technical performance, cost or schedule.
TABLE 1 INPUTS TO PRICING DECISION
With the complexities involved, it is not surprising that many business managers consider pricing as an art. Having the right intelligence information on customer cost budgets and competitive pricing would certainly help. However, the reality is that whatever information is available to one bidder is generally available to the others. Even more revealing is the fact that intelligence sources are often unreliable. There is only one thing worse than missing information – wrong and misleading information. When it comes to competitive pricing, the old saying applies: those who talk don’t know; and those who know don’t talk! Pricing remains an art, at least partially. However, a disciplined approach certainly helps to develop all the inputs for a rational pricing recommendation. Table 1 shows the principal inputs needed for the pricing decision. Table 2 delineates the decision-making process in detail. In the final analysis pricing remains an art. However, the management tools provide the discipline for orderly conducting of the decision process and for developing the rationale which leads to the final price. A side benefit of using a disciplined management process is that it leads to documentation of the many factors and assumptions involved. These can be compared and analyzed at a later point in time, contributing to the learning experiences that make up the managerial skills needed for effective business decisions.
The Driving Forces in the Win Equation
The driving forces of a winning bid proposal include more than just price. They include factors demonstrated in the proposal as well as the image built prior to submission. Figure 3 relates these factors for various degrees of program complexity and competition. It shows that “Low Cost” is a strong driving force toward winning only in a bid environment of “Low Program Complexity and High Competition.” In all other situations factors such as (1) past experience, (2) compliance, (3) soundness of approach, and (4) innovative features are potentially more important to winning than low price or cost.
PRICING DECISION PROCESS
|1. Cost Estimate|| |
Obtain a realistic cost estimate for the proposed baseline. Scrubbed, and agreed-on with operating departments.
|2. Risks|| |
Summarize associated risks and contingencies and their impact on the program cost. Areas: technical, schedules, staffing, facilities, licenses, patent rights, customer equipment, etc.
|3. Program Budget|| |
Update customer budget or budget estimate for the proposed program. (This information is available usually long before an RFP is issued).
|4. Cost Realism|| |
Assure cost realism by comparing the major cost elements to top-down estimates, customer budget bogies and parametric ratios. Correct or justify all abnormalities.
|5. Competitive Assessment|| |
Update. Summarize the strengths and weaknesses of major competitors against your firm, considering (1) related experience, (2) current business, (3) customer relations, (4) unique features in proposed program, etc.
|6. Business Objective|| |
Refresh on strategic business objectives. “why are we bidding”
|7. Customer Objective|| |
Summerize custemer's Key Objectives:
|8. Base Price|| |
Adjust the cost estimate for risks and add the desired profit margins/fees.
|9. Pricing Decision|| |
Compare the base price to the (1) customer budget, (2) competitive assessment, (3) business objectives, and (4) customer objectives. Derive two price figures: (i) the highest price that most likely will still win the job and (ii) the lowest price your company is willing to negotiate. Hopefully, this price is below the threshold for winning.
Figure 3 also shows that “Past Experience” becomes increasingly important with increasing program complexity and risks.
THE DRIVING FORCES IN WINNING A BID PROPOSAL DEPEND ON PROGRAM COMPLEXITY AND COMPITITIVE PRESSURES FIGURE 3
Another insight into pricing strategies is provided by considering the effects of the business environment. As shown in Figure 4, profits are squeezed out by aggressive pricing. Looking at selected factors of business environment, Figure 4 illustrates that the need for aggressive pricing increases with the (1) strength of competition, (2) tightness of customer budget, (3) internal cost deficiencies, (4) program risks, and (5) the desire to win.
EFFECTS OF BUSINESS ENVIRONMENT ON PRICING AND PRODUCTION FIGURE 4
Two Global Pricing Strategies
The specific pricing strategies must be developed for each situation individually. However, frequently one of two situations prevails in pursuing project acquisitions competitively.
Type I: One of a Kind Program with Little or No Follow-on Business
The objective for this type of new business acquisition is to win the program and execute it profitably and satisfactorily according to contractual agreements.
1. Develop Cost Model and Estimating Guidelines. Design proposed project/program baseline for minimum cost, to minimum customer requirements.
2. Estimate cost realistically for minimum requirements.
3. Scrub the baseline. Squeeze out unnecessary costs. Trade-offs. Make-Buy.
4. Determine realistic minimum cost. Obtain commitment from performing organizations.
5. Adjust cost estimate for risks.
6. Add desired margins. Determine the price.
7. Compare price to customer budget and competitive cost information.
8. Bid only if price is within competitive range.
Type II: New Program Has Potential for Large Follow-on Business or Represents a Desired Penetration into New Markets.
The objective for this type of new business acquisition is often to win and perform well, therefore gaining a foothold in a new market segment or customer community, rather than making a profit.
1. Design proposed project/program baseline compliant with customer requirements, with innovative features but minimum risks.
2. Estimate cost realistically.
3. Scrub baseline. Squeeze out unnecessary costs.
4. Determine realistic minimum cost. Obtain commitment from performing organizations.
5. Determine “should-cost” including risk adjustments.
6. Compare your final cost estimate to customer budget and the “most likely” winning price.
7. Determine the gross profit margin necessary for your winning proposal. This margin could be negative!
8. Decide whether the gross margin is acceptable according to the must win desire.
9. Depending on the strength of your desire to win, bid the “most likely” winning price or lower.
10. If the bid price is below cost, it is often necessary to provide a detailed explanation to the customer of where the additional funding is coming from. The source could be company profits or sharing of related activities. In any case, a clear resource picture should be given to the customer to ensure cost credibility.
Comparing the two pricing strategies for the two global situations reveals a great deal of similarities, at least for the first five points. The fundamental difference is that for a profitable new business acquisition the bid price is determined according to actual cost, while in a “must win” situation the price is determined by the market forces. It should be emphasized that one of the most crucial inputs to the pricing decision is the cost estimate of the proposed baseline. The design of this baseline to the minimum requirements should be started early, according to well defined ground rules, cost models and established bogeys. Too often is the baseline design performed in parallel with the proposal development. This is too late to review and fine-tune the baseline for minimum cost. Such a late start further does not leave much of an option for a final bid decision. Even if the price appears outside the competitive range, it makes little sense to terminate the proposal development. All the resources have been spent anyway. One might as well submit a bid in spite of a remote chance of winning.
Clearly, effective pricing starts a long time before proposal development. It starts with preliminary customer requirements, well understood subtasks and a top-down estimate with should-cost bogeys. This allows the functional organization to design a baseline to the customer requirements and cost targets; and gives management the chance to review and redirect the design before the proposal is cast in concrete. It further gives management the opportunity to assess the chances of winning early in the acquisition cycle; at a point where additional resource allocations may still help or the acquisition effort can be terminated without having diverted too many resources in a hopeless effort.
The final pricing session should be an integration and review of information already well known in their basic context. The process and management tools outlined in this paper should help to provide the framework and discipline for deriving pricing decisions in an orderly and effective way.
This paper offers a fundamental look at the four phases which make up the anatomy of project marketing. First we must identify a new project opportunity, then we must analyze and develop it, prepare a bid proposal, price it and negotiate the contract. Winning new project business in competitive markets requires sophisticated management tools and techniques.
Companies who win their fair share of new business usually have management teams that make fewer fundamental mistakes. Their managements use good logic and judgment supported by these tools. They adhere to disciplined methods for guiding the acquisition process and for making crucial decisions. These are the managers who position their companies uniqely in the competitive field by building quality images and submitting responsive bid proposals, competitively priced. These are the managers who are recognized for their skills of perpetuating and growing project businesses in our rapidly changing environment.
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