Strategy

Global Contracts: Prices Without Borders?

Too often, cross-border agreements are a one-way street.
Nikos ValanceAugust 27, 2001

At first glance, global pricing contracts look like a win-win situation for corporate buyers and sellers intent on doing more business across international borders. After all, multinational companies increasingly want to buy products or services from one supplier, at the same price, in every country in which they do business. For their part, suppliers value the additional volume such contracts promise.

Global pricing contracts, or GPCs, which first appeared in the early 1990s, are supposed to offer those benefits in more or less equal measure. But on closer examination, these contracts look more like a zero-sum game, with suppliers coming out on the losing end. They complain that the contracts’ promises regarding volume levels too often can’t be met, because of a lack of dependable information about conditions in disparate markets. Worse, they accuse some customers of negotiating in bad faith. Suppliers generally don’t sue, because they don’t want to jeopardize what business they do enjoy, or because of the costs and uncertainties involved.

But their disappointment is clear enough. “At the beginning, there were really high expectations for GPCs,” says Ed Tobey, vice president for South America at Stepan Co., a specialty chemical company based in Northfield, Illinois. But, he contends, “very few [suppliers] have been able to meet those expectations. I haven’t met a company that has come close.”

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Stepan, for example, supplies raw materials under a GPC to Procter & Gamble. Under the arrangement, says Tobey, Stepan deals with one buyer at P&G’s headquarters who is buying for its subsidiaries in a hundred countries. Says Tobey: “That one person in Cincinnati can’t understand the market dynamics in those hundred countries. He doesn’t have enough information.” P&G did not respond to repeated requests for comment.

The problem isn’t limited to P&G, he says. “Gaps in communication exist on all sides, everywhere, and it’s the biggest problem area,” says Tobey.

UNKNOWN QUANTITIES

Stepan isn’t the only supplier unsatisfied by GPCs. Consider Fritz, an Atlanta-based international freight forwarder that was acquired in May by United Parcel Service. According to John Fitzgerald, regional vice president for client relations, many times Fritz can’t get firm enough data on a customer’s volume from that customer to know if it could earn a profit under a GPC. For that reason alone, it won’t sign up. “Often we don’t know the total volume of the global system,” says Fitzgerald. “Going in with no data requires leaps of faith.”

A leap of faith may be particularly risky when a customer’s local business units have enough autonomy to decide not to go along. “There are turf issues” that must be dealt with beforehand, says Fitzgerald. Otherwise, he warns, “you have a global agreement signed, but you have to convince everyone in the international division to use you. That’s when you find out that a $10 million deal is really a $1 million deal.”

Fitzgerald notes, however, that the current lack of global volume data can ultimately work to the advantage of a supplier willing to bring its own knowledge to bear on the issue, and to exercise great patience. Eventually, he says, the ability to gather the necessary global sales data will give the supplier something of great value to offer the client in return. “Lots of companies have individual business units that run their own divisions and make their own decisions,” he explains. “Because corporations are trying to aggregate, anyone selling to them can bring that part of the analysis to the table.”

That, in turn, may encourage headquarters to get local divisions, especially highly decentralized ones, to comply with the contract. To get that kind of leverage, however, Fitzgerald contends a supplier must know much more than the sales levels of local subsidiaries. “They may want someone on site in Johannesburg or Venezuela to do customer service,” he points out. “You have to know that.”

OUTRIGHT ABUSE

Even if better information were available, says Stepan’s Tobey, such contracts could still be nightmarish for suppliers because “customers [not including P&G] have abused the process.” He explains that too often, customers negotiate a global contract and then allow local business units to ignore it. In such circumstances, he says, “a global contract is not really global. If there is a local, low-cost source, you’re back to meeting the local competition. You can call it global, but it’s not. It’s really country by country.”

Fitzgerald agrees that noncompliance among customers is sometimes intentional. “The client is out to leverage volume and get low pricing,” he says. For that reason, Fritz is becoming more selective about which companies it will do business with under a GPC. Indeed, says Fitzgerald, even with sufficient data, Fritz enters into such contracts only when a customer is critical to its long-term strategy. “Someone who is not looking for a strategic relationship but only for a global price would not be a global account of ours,” he says.

With such a relationship, on the other hand, “when things don’t turn out as expected, you get the data together, sit down, and figure out what you can do to rectify the situation going forward,” he explains.

Until more customers see it the same way, however, they can expect suppliers to fight demands for global contracts. “They say they want world-class support,” says Fitzgerald. “We say we want world-class customers.”

Nikos Valance is a contributing editor of CFO.

MAKING GLOBAL PRICING WORK

Suppliers contend these steps improve their chances of making a global pricing contract work,
if only because the measures increase their leverage with customers:

SEEK CONTROL. Dealing only with customers that have a central committee to oversee local business units “should get you better compliance,” says John Fitzgerald, regional vice president for client relations at Fritz. But he cautions that the committee must have a truly global perspective: “The people on the committee shouldn’t all be from the U.S.”

DELIVER THE GOODS. Not many suppliers can meet increasing demands for just-in-time delivery on a global basis, concedes Ed Tobey, vice president for South America at Stepan Co. Yet he insists that suppliers must at least come close. “You want to be able to provide next-day shipment,” he says.

IMPROVE SERVICE. “You need customer service on the ground in every country,” says Tobey. “You have to know who to call to solve problems.”

THINK LOCALLY. If distribution plays a big role in pricing, much will depend on relations with middlemen. In that case, says Andy Sirkus, manager of global contracting and pricing for Xerox, “the key is to have a global network of dealers that accommodates the pricing plan.” — N.V.