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Name :
SIU PhD ID :
Date:



Serving Institutional Customers : Challenges and Opportunities


Background:

For the purposes of this study, the term Institutional Customers quite simply means that
segment of the market consisting of corporations and other organizations , covering both
private and public sector, that make purchase decisions , carry out and complete the
transaction through paid employees entrusted to make purchase decisions on behalf of
the owners of the business, large and small, as compared to individual customers who
carry out the purchase process for themselves and their families.

Institutional customers differ from individuals in every phase of the purchasing process.
The need for products or service is often driven by considerations different than those of
the individual customer. The product or service to be procured is specified in a formal
process involving several stakeholders, sometimes using external resources. Offers are
invited through a formal tendering process, and offers so received are evaluated against a
pre-set criteria by a group of people. The delivery of the goods or services is taken by a
group of people who are often different from the group who initiated, specified or
ordered the purchase.

From the vendors stand point, the processes of addressing the customers need, making an
offer against a tender, executing the order and effecting the delivery, and providing after
sales service are often all handled by different groups of people, organized according to
functions they carry out.

Further, there are certain aspects of the institutional purchasing process that are not
relevant to an individual customer - for example the requirement of total transparency
and a demonstrated objectivity in the decision making process, such as in a multi-billion
dollar defense deal.

Thus the customer and the vendor both engage with each other in a complex manner.
The result is that institutional customer is perhaps the least understood and remains under
serviced to a large extent. There are several challenges and opportunities for both
customers and vendors to derive maximum value from the multiple and very large
transactions that take place in this segment.


The Purchasing Process What happens in a typical Institutional Customer

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The need for purchase of a service or product can be initiated at different functional
levels. At an operational level, need for a product or service may arise from enhancing
operational efficiencies, de-bottlenecking, and routine equipment replacement decisions.
At a senior management level, a major strategic initiative may drive a decision to invest
and therefore the need to purchase products and services. A marketers efforts to better
understand the customer and satisfy or even stimulate a latent need must be directed at
the appropriate level in the customers hierarchy. Obviously, the level at which the
engagement takes place with the customer varies vastly.

Specification of the product or service to be purchased is often the result of a group
effort, sometimes involving the help of an external customer. It is important to
understand this process, so that specialist knowledge of the product / service can be
made available to the customers team at the right time, so that the most appropriate
technology is adopted and specifications drawn up the customer.

Obtaining prices and technical offers from vendors against the specifications drawn up
can vary from a simple open enquiry to a very formal sealed tender process. In each case,
an informal or formal screening process is often adopted, before offers are invited. Being
on the customers radar is important to be included in this shortlist. Other aspects to be
understood are the need for clarity of work scope and specifications in the tender
document, and time allowed for vendors to make responsive bids, and recognition of cost
and efforts put in by the vendors to bid. In certain cases, customers pay an agreed amount
to each technically qualified bidder, to encourage submission of well formulated and
fully response bids.

Financial closure , in case of a project investment decision , or tying up sources of
finance to meet the project investment expenses are key challenges to be recognized and
understood. An offer with a financing option can provide an overwhelming advantage.
Often, such financing options are offered through the Government of the home country
of the vendor, and considerable knowledge and efforts are required on the part of the
vendor to recognize this need and fulfill it.

Vendor selection is based more often than not on the basis of lowest bid received among
a set of pre-qualified bidders. Often, price bids received are adjusted to account for
variations in the offer against the enquiry specifications so as to make the offers received
comparable. This is one process where a certain amount of subjectivity comes into play
and can vary from no adjustment at all ( bids that are not perfectly compliant are rejected)
to substantial adjustment in certain cases. In this system, an offering with features of
substantial value to the customer that has not been stipulated in the enquiry
specifications, or clearly explained in the proposal made to the customer, tends to be
ascribed little or no value during evaluation.

Typically, the order execution process is carried out by teams that have played no role in
the earlier processes. The service or product is delivered by a team to the end-user group
in the customer, who has not had a substantial say in the product / service that has been
ordered and is being delivered. This often leads to conflicts during delivery and leaves
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behind a dissatisfied customer team and a frustrated vendor team. There is often a gap
between the quality of the product or service level that is expected and what is actually
delivered. Similar mismatches arise with regard to the delivery schedule.

Appropriately defined payment terms are a key to smooth progress of order execution.
Mistakes can lead to unhealthy cash flows for either party, and could well result in delays
or overexposure of risk to either party.

The after sales experience of the customer team depends to a great extent on the amount
of operational training, on site attendance and after sales support that has been specified
and contracted in the enquiry and contract. Unless the need for such support is accurately
assessed by both the customer and vendor in initial stages and covered in contract, after
sales experience can not only be frustrating but damaging to the vendors reputation and to
the customers operational efficiency and profitability.

Finally, a key outcome of a business transaction between partners is a mutual desire to do
business together again, having gained trust and confidence in each other. Each partner
would have invested effort and money in cultivating such a relationship, for the benefit of
both organizations. However, some purchasing practices do not have a process for .
valuation of such value propositions like history of on-time delivery, quality of the
product and service levels, goodwill and trust, ethical business practices, and safety
record. The immense value underlying these aspects can remain un-captured in a
business transaction with an Institution, where more often than not, purchase decisions
are made of the basis of lowest quoted prices.

What ails the Institutional Customer Vendor relationship?

Thus, an institutions purchasing process is characterized by complex processes that are
not easily understood . In addition, the following aspects further complicate the buying
process and the relationship between the customer and the vendor :

- The time span of engagement between the customer and vendor is long,
sometimes as much as a few years, during this period of time key individuals
from both the customer and vendor organizations change, and the understandings
involving these individuals in the purchase process are lost as the process
continues
- The overwhelming need for transparency and objectivity in decision making,
particularly in large purchases involving evaluations of products of competing
technologies like defense deals take several years of effort
- Purchase decisions involves huge sums of public funds, and no amount of probity
in the transaction can guarantee public approval and acceptance
- Other aspects that are to be understood in the decision making and delivery
process are
o Influence of public opinion
o Political pressures , both domestic and international
o Regional economic development
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o Effect of international events


In an environment as described above, the significance and benefits of modern
management concepts and processes that aim to achieve Customer Delight and Brand
Loyalty , so commonly applied in the case of individual purchasers, is not immediately
apparent and more often than not neglected.


What makes an Institutional customer so important a market segment?

Institutional business is attractive, in spite of the many challenges brought out above due
to
- Volume of business opportunity
- Opportunity to leverage technological advancements
- Opportunity to participate in nation building
- Ability of customers to pay, often backed by sovereign guarantee
- Legal recourse available in the event of default

At the same time the following aspects are more unsavory about Institutional customers
- Sometimes institutional customers tend to display insolent might while
conducting business
- Under developed processes for handling inevitable changes in scope of work and
variations to contract
- Onerous conditions of contract, often one-sided in favor of the Customer
- Risk sharing practices are not developed , not encouraged

Overall, the positive aspects of serving institutional customers outweigh the challenges,
and when handled with appropriate understanding, there is a scope for significant
increase in value creation in this market segment.

Objectives of the study:

The objective of the study is to
- Understand the purchasing influencers and processes in a wide range of
industries, across economic regions , including both private sector and
government institutions
- Special focus will be on the following sectors, most significantly populated by
institutional customers
o Oil & Gas
o Energy
o Infrastructure
o Defence
- Identify and define value variables , apart from price that are of significance to
both customers and vendors
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- Develop models for evaluating value variables in an objective way, as a valuable
addition to the traditional price based comparison


Proposed Methodology:

- Literature survey , understanding of the present knowledge on the above subject
- Study of purchasing processes in key industry sectors, post 1992 liberalisation era
- Interview key decision makers
- Conduct surveys among industry professional for opinions on value creation
- Develop models for evaluation of non-monetary value propositions
- Apply developed models to a variety of test cases and validate the same .
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