Brexit, political uncertainty and increased interest rates; Neil Clothier, senior negotiator at Huthwaite International, discusses how businesses can plan ahead, manage contracts and negotiate beneficial deals to future proof their finances in light of rate rises and an uncertain economy.
Generally speaking, a rise in interest rates is associated with a sign of strength and growth in the economy. For businesses, this can be a mixed blessing: those with significant reserves will benefit from greater returns, a potential increase in consumer spending and – depending on the sector – the ability to charge more for products and services. However, in reality, the flipside of this is increased borrowing costs. And, with a huge number of businesses relying on loans and third-party finance, this can seriously impact a company’s bottom line.
With the Bank of England predicting a further two rate rises over the next three years, as well as the ongoing political and economic uncertainty Brexit has presented, many business owners are understandably feeling nervous about the future. However, an area many often fail to consider when it comes to increasing margin, and re-establishing stability, is negotiation; both internally and externally. At times of uncertainty, better negotiation can and should pay dividends.
So, how can businesses better utilise negotiation tactics to help strengthen business growth, profit and general financial stability? Effective negotiation is not a dark art. It’s a well-researched science that can be used by all businesses with the right training, and there are some initial strategies that can be implemented to help stabilise the bottom line.
Renegotiate existing supplier contracts
Firstly, reviewing supplier contracts can be a straightforward and effective way to increase margin and lower operating costs. A common misconception is that contracts aren’t open for renegotiation once terms are agreed. This simply isn’t true. In most cases negotiation is always an option.
I say in most cases. it’s important to apply a strategic approach to any cost conversations you start. You don’t want toalienate a contractor or supplier that your business is critically dependent on.
For the purpose of increasing profit through contract renegotiation, most companies have suppliers that fall into one or more of three main categories. These are;
- Non-differentiated – when the supplier has an undifferentiated commodity product that’s easy to source elsewhere.
- Semi-strategic – when the supplier is important and harder to replace but not critically so.
- Strategic and critical – when the supplier is critical to your business and would be very hard to replace.
With non-differentiated suppliers, you can renegotiate contract terms quite easily. There are a bountiful number of suppliers offering the same, or similar service, so your business is, therefore, crucial to them. The balance of power is firmly with you.
An example of a non-differentiated supplier is an office stationary provider – this relationship can be treated purely on a transactional/commercial basis, in other words, you can be firm on cost, and have plenty of competitor quotes to play with. This provides plenty of room for negotiation, without opening your business to risk, should your supplier walk away.
Semi-strategic suppliers represent the ‘broad band’ in the middle where you’ll likely find the most pay off with regards renegotiation success. Neither party wants to leave the other, the relationship is important to both sides but not critically so. The key to an effective renegotiation here is to reaffirm your common ground. That is, that you’re both in the relationship to make money. You both want to continue working together. By them allowing you to adjust your financial agreement means you’ll be betterable to continue the relationship for the good of you both.A renegotiation in this case is a win-win.
The third type of supplier contracts are those that are strategically critical to your business, such as a specialist manufacturer. These negotiations need to be handled with great care and undertaken in the context of the negotiation agreements you have in place. Any attempt to revisit these mid-term could risk a negative impact on the relationship and should be avoided.
When categorising suppliers it comes down to scarcity. How unique is the supplier’s solution? In other words, how many competitors does the supplier have? A supplier with few or no competitors will constitute high supplier risk than one with many. The specialist manufacturer supplier, for example, would be very difficult to substitute and so constitutes a high supplier risk. On the other hand, and referencing my previous point, the supplier of office stationery will have many competitors and will be categorised as low supplier risk.
Meanwhile, profit impact is about the financial impact of the good or service. How dependent is the company on the particular supplier for its financial success? In the case of the specialist manufacturer, its products are likely to be at the heart of a company’s product offering, meaning it has high-profit impact, whereas the supplier of office stationery has insignificant profit impact.
However, no matter how intimidating the prospect of a negotiation may seem,remember, vendors and suppliers have a business to run too and are keen on expanding them just as much as you are. One of the best ways to ensure you have an equal say in re-negotiations is by putting forward the value you bring to the table, not just financial, but non-financial services in lieu of cash, such as strong connections in the business community, which could lead to new business for the supplier.
Buy more effectively and negotiate on price
Another point to consider is how you purchase and negotiate on price. Big businesses utilise the services of procurement companies for a reason – they can save significant amounts of money by negotiating on price and quantities. Applying, the ‘I can and will negotiate on this deal’ attitude to your own business strategy can reap real rewards. If you ensure maximum margin is extracted from all new supplier contracts from the offset, it will pay big in the long run.
Most people have a good understanding of what they need to do to secure a quality deal, however, in practice, buyers are making frequent errors that unwittingly see them lose profit.Price negotiations with suppliers can depend heavily on the skill of individual person in question. However, for those getting it right, smart purchasing has the power to accelerate market development and boost profitability.
But shopping around doesn’t just mean opting for the cheapest deal – it’s also important to consider the service you are set to receive in return. Find a comfortable middle ground. A common mistake made by many businesses is to buy the cheapest goods and as a result this can seriously impact on productivity. Think carefully about the areas in which you can afford to compromise and the areas which require a little extra investment. Striking this balance is crucial to maintaining quality service for your customers.
Of course, negotiations don’t always fall into an easy three step rule, and can quickly become a complex and time intensive strand of your business strategy if not effectively managed. Despite this, businesses really can’t afford to feel intimidated by the prospect of negotiating with existing or new suppliers, not least in a climate where interest rates are rising and deals are being rocked by an uncertain political climate.
Whether you invest in training designed to up-skill your team and improve their negotiation skills, or you take baby steps and start by looking at smaller contracts that can be re-negotiated to ease cash flow, the important thing to do is to consider negotiation as an essential tool within your business strategy, and ensure you develop an effective and systematic approach to negotiations.
OPEC oil has advantage over U.S. shale during pandemic recovery
By Jennifer Hiller
(Reuters) – The once-brash U.S. shale industry, which spent profusely in recent years to grab market share, is now focused on preserving cash, putting it at a disadvantage to low-cost OPEC producers as the global economy begins to gear up again.
Prior to the pandemic-induced downturn, OPEC countries led by Saudi Arabia restrained their production, eager to bolster prices to fund national budgets dependent on oil revenue. Shale drillers took advantage, boosting U.S. output to a record 13 million barrels a day.
But attendees of the year’s top energy conference made clear that even with a buoyant, $60-per-barrel oil price, shale will not come roaring back from the Covid-19 pandemic as it did from the 2016 downturn.
By contrast, the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, has more than 7 million barrels of daily oil output sitting in reserve. This positions them to boost production much more easily than shale players for the first time in years.
The concern about free-wheeling shale companies taking advantage of OPEC’s output curbs led to a brief supply war in March 2020. Russia balked at a three-year agreement to extend production cuts, and Saudi Arabia responded by flooding the markets with oil, leading U.S. futures prices to slump to negative-$40 a barrel.
“Let’s face it. OPEC has had a very difficult time managing to accommodate the U.S. shale players and their ability to grow at low prices,” said IHS Markit analyst Raoul LeBlanc, adding that the key debate within OPEC is what oil price is just low enough to avoid a massive U.S. response.
The pandemic destroyed a fifth of global fuel demand, and numerous shale companies declared bankruptcy, while others arranged mergers to offload debt. Frustrated investors sent energy-related stocks slumping throughout 2020.
While shale executives expressed concern about reopening the wells too quickly, OPEC nations are expected to ease supply curbs at their meeting later this week, without having to look over their shoulder at shale.
“The worst thing that could happen is that U.S. producers start growing rapidly again,” said ConocoPhillips Chief Executive Ryan Lance.
The market widely expects OPEC to ease production cuts, which were the deepest ever, by around 1.5 million barrels per day (bpd), with OPEC’s leader, Saudi Arabia, ending its voluntary production cut of 1 million bpd. (Graphic: Pandemic ends U.S. oil output) climb)
At CERAWeek, OPEC vs. shale is often discussed as a showdown between competing interests, but the dynamic of Texas vs. the Middle East is nearly invisible this year. Just one panel discussion in a five-day schedule focused on shale. Neither the Exxon or Chevron CEOs mentioned shale during their talks. Both companies have cut spending in the U.S. Permian Basin.
Crude on Tuesday topped $60 per barrel, up from $44.63 at the start of December, high enough to bolster U.S. producers’ earnings given recent cost cuts.
In the past, rising prices have enticed shale companies to ramp up production even after they promised prudence, and $60 oil would have once prompted companies to rush drilling rigs and frack fleets back to work. That is not happening now.
“They are not taking the bait,” LeBlanc said.
Private companies are likely to increase oilfield activity, but not enough to meaningfully boost U.S. output, said LeBlanc, adding that U.S. spending is likely to remain around $60 billion, flat with 2020, as companies prioritize shareholder returns.
“The severe drop in activity in the U.S. along with the high decline rates of shale and the pressure from investment community to maintain discipline instead of growth means in my view that shale will not get back to where it was in the U.S.,” said Occidental Petroleum CEO Vicki Hollub.
(Reporting by Jennifer Hiller; additional reporting by Laila Kearney and Devika Krishna Kumar; editing by David Gaffen and David Gregorio)
U.S. oil industry lobby weighs support of carbon pricing – source
By Valerie Volcovici
WASHINGTON (Reuters) – The American Petroleum Institute (API) is weighing endorsing a price on carbon emissions, a major shift after long resisting mandatory government climate policies, a source familiar with the decision making said.
The API, the main U.S. oil industry lobby group that includes most of the world’s biggest oil companies, is considering carbon pricing “among other policy solutions to reduce emissions and reach the ambitions of the Paris Agreement,” the source said, confirming a report about the policy shift by the Wall Street Journal.
The group is confronting its previous resistance to regulatory action on climate change amid a shift in industry strategy on the issue and the new U.S. presidency.
European member Total quit the group because of disagreements over API’s climate policies and support for easing drilling regulations and the Biden administration is pursuing a policy agenda that would shift the United States from fossil fuels.
A draft statement of the policy shift reviewed by the Wall Street Journal said the group does not endorse a specific carbon pricing tool such as a tax on carbon emissions or emissions trading scheme. The source said, however, that the group’s State of American Energy report released in January was supportive of a market-based carbon pricing policy.
The API did not comment on whether or when the group would formally endorse a price on carbon but said it has been working for nearly a year on an industry-wide response to climate change.
“Our efforts are focused on supporting a new U.S. contribution to the global Paris agreement,” said API spokeswoman Megan Bloomgren.
Within API, there has been a widening rift between Europe’s top energy companies https://www.reuters.com/article/us-total-api/frances-total-quits-top-u-s-oil-lobby-in-climate-split-idUSKBN29K1LM, which over the past year accelerated plans to cut emissions and build large renewable energy businesses, and their U.S. rivals Exxon Mobil Corp and Chevron Corp that have resisted growing investor pressure to diversify.
Other major industry groups like the U.S Chamber of Commerce and the Business Roundtable https://www.reuters.com/article/usa-business-carbonpricing/u-s-ceo-group-says-it-supports-carbon-pricing-to-fight-climate-change-idUSKBN2672W4, which includes Chevron, over the last year have endorsed market-based carbon pricing.
Chevron said it has engaged those groups and API “to support well-designed carbon pricing.”
“We support economy-wide carbon pricing as the primary policy tool to address climate change, applied across the broadest possible area to maximize environmental and economic efficiency and effectiveness,” Chevron spokesman Sean Comey said in an e-mailed statement.
BP and Shell declined to comment.
(Reporting by Valerie Volcovici; Editing by Chizu Nomiyama and Christian Schmollinger)
Australian economy storms ahead as COVID recovery turns ‘V-shaped’
By Swati Pandey
SYDNEY (Reuters) – Australia’s economy expanded at a much faster-than-expected pace in the final quarter of last year and all signs are that 2021 has started on a firm footing too helped by massive monetary and fiscal stimulus.
The economy accelerated 3.1% in the three months to December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, higher than forecasts for a 2.5% rise and follows an upwardly revised 3.4% gain in the third quarter.
Despite the best ever back-to-back quarters of growth, annual output still shrank 1.1%, underscoring the havoc wreaked by the coronavirus pandemic and suggesting policy support will still be needed for the A$2 trillion ($1.57 trillion) economy.
The Australian dollar rose about 10 pips to a day’s high of $0.7836 after the data while bond futures nudged lower with the three-year contract implying an yield of around 0.3% compared with the official cash rate of 0.1%.
“The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market,” said Craig James, Sydney-based chief economist at CommSec.
James expects the economy to rebound 4.2% in 2021.
Data on credit and debit card spending by major banks as well as official figures on retail sales, employment and building activity point to a strong start for this year.
Marcel Thieliant, economist at Capital Economics, expects GDP growth of 4.5% in 2021, “which implies that allowing for the slump in net migration due to the closure of the border, the economy will suffer no permanent drop in output as a result of the pandemic.”
SUPPORT STILL NEEDED
Australia’s economy has performed better than its rich-world peers thanks to very low community transmission of COVID-19 together with massive and timely fiscal and monetary stimulus.
Its economic output declined 2.5% in 2020, far smaller than a 10% drop in United Kingdom, falls of 9% in Italy, 5% in Canada and more than 3% in the United States.
“Our economic recovery plan is working, and today’s national accounts is a testament to that fact,” Treasurer Josh Frydenberg said in a news conference. “The job is not done,” he added.
“There are challenges ahead. But you wouldn’t want to be in any other country but Australia as we begin 2021.”
To help blunt the economic shock from the pandemic-driven shutdowns, the Reserve Bank of Australia (RBA) slashed interest rates three times last year to a record low 0.1% and launched an unprecedented quantitative easing programme. The government announced a wage subsidy scheme to keep people in jobs while banks deferred payments on home loans and cut borrowing rates to help boost credit growth.
On Tuesday, the RBA re-committed to keep three-year yields at 0.1% until its employment and inflation objectives are met, which policymakers don’t expect until 2024 at the earliest.
Indeed, Wednesday’s data showed there was barely any domestic-driven inflation in the economy with the biggest price rises coming from commodity exports.
The RBA has repeatedly said the unemployment rate must fall to around 4% from above 6% now to help drive wages growth above 3% and for inflation to pop back into its 2-3% target band.
“Stimulus and support measures are still very much required,” CommSec’s James said. “Spare capacity will remain in the job market for a few more years, keeping the cash rate anchored at 0.1%.”
($1 = 1.2780 Australian dollars)
(Reporting by Swati Pandey; Editing by Sam Holmes)
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