From The Cannabis Diaries #4: No Regrets
Updated: Jul 18, 2019
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Organizations that use third party providers typically have regrets. Although most IT outsourcing or support agreements have an out clause, proving cause for separation and finding an alternative are significant. There is a high price to pay for switching.
In the cannabis space, most teams have a relatively lean technology footprint, as you would expect from small to medium sized businesses. High growth attracts attention and technology providers are banging on the doors, trying to gain a toehold in the industry.
Across industries, companies are shifting their IT costs to cloud solutions and providers, e.g., Amazon Web Services, Google Suite, and Salesforce. Cutting a purchase order can allow a business unit or department lead to tap into powerful IT capabilities, for better or for worse.
As an aside, internal IT subject matter experts or leaders should be involved before software, hardware, or a provider is selected. IT struggles to defend their organization and control costs without partnership or collaboration.
At one cannabis client, the client IT team was attempting to secure sales data out of concern that competitors had inside information. They learned that the business development team had bought 3 separate cloud based Customer Relationship Management (CRM) tools. This made it expensive and hard to secure, let alone get consistent sales metrics to drive incentives and performance.
For now, we’re going to look at practical advice on how to structure service provider contracts in a way that will reduce your chances of having significant regret. We will touch on improving the business and IT partnership another time.
If you stop reading or listening now, simply apply this advice: Negotiate these agreements as you would a builder or an electrician for your home. Clear outcomes, estimates with maximum and minimum values, and payments based on progress.
Alternatively, look at the potential contractor or provider as Homer Simpson and you are Herb Powell, designing a car together on a legendary episode from The Simpsons.
1. Quantify Your Demand:
Look at your needs. We talked about this a bit in an earlier podcast about Let the Right Ones In. The idea being that if you can’t list the top three to five things that you want out of a provider or piece of technology, why are you doing it at all?
At a 2 person tech startup, we were asked to assess the viability of the startup on behalf of the investors. Immediately, we noticed $5K a month in spend on Amazon Web Services. This is an absurd amount of money for a startup of that size. What we found was that the developers would simply create new development and test environments and never close them down. This was like leaving your air conditioning on with the doors and windows open 24 x 7.
In the case of the 3 CRM tools, the sales team clearly wasn’t happy with any one solution. For some reason, they had tried and abandoned at least two tools, but they were still on the books. The licenses were still active.
If the technology investment is going to cost more than a used Honda Civic, you must answer the following questions:
What is the problem that you are trying to solve?
Why have prior efforts to solve the problem failed?
How would you define success?
How expensive is this problem?
How much is the solution going to cost to create and maintain?
In practical terms, we see a number of clients negotiate 24 x 7 support agreements. In most cases, the 24 x 7 availability comes with a significant premium. Here are the questions above applied to a support scenario:
We have retail, office, and warehouse facilities. The network goes down regularly in all three locations for hours at a time. This happens every other week, seemingly at random.
We have swapped out routers and equipment twice at each location. Our current IT provider is slow to respond. They claim that our HD security cameras and people watching YouTube are killing our bandwidth, creating the problem. We don’t have anyone on staff that can verify their claim.
We would have reliable office internet connectivity to support security cameras, Skype video conferencing, and allow employees to listen to music. The warehouse needs reliable connectivity for pick, pack, ship, delivery route planning, and inventory loss prevention.
The warehouse runs 24 x 7. Late customer orders probably cost us $10K for every outage, considering customer frustration and lost time. Retail sites are open 9AM – 8PM. Register reconciliation usually takes another hour. Main office hours are 8AM – 6:30PM. All Pacific Standard Time. Retail losses are roughly $1K per store per outage. Lost productivity in the main office probably costs us $2K with every outage (50 employees at the main office are dead in the water).
Note that the last question cannot be answered yet, but it should be revisited before deciding to execute an agreement. The initial cost to achieve, plus the ongoing maintenance and administration costs, need to be estimated for at least the next 12 months.
Do you need to have a provider on standby to reset passwords after hours or fix your network at midnight? Smart agreements align to demand, such as warehouse support 24 x 7 with tight support deadlines during peak demand periods, offset by main office support hours that align with their particular time zone or needs.
2. Use Plainspoken Language.
A number of technology providers will use jargon to render a contract virtually unenforceable. If you cannot understand it before you sign it, how can you expect to enforce it after you are a paying customer?
Example of vague contract language:
“We will determine or baseline the performance targets after 90 days.”
90 days is an eternity in the cannabis industry. If the provider has existing customers, onboarding and baselining performance should be eminently predictable. A better contract sets the targets and revisits them after 30 or 60 days (typically two billing cycles), if one party is significantly under or over the targets.
For example, if the provider expects you to call for help 8 times a day and you call 32 times a day, you need to dig in together and determine if the 32 calls are necessary because it wasn’t fixed correctly or if people are forgetting the solution repeatedly.
Your contract should include a clear set of performance standards, focused on outcomes that you want to achieve and in terms that you understand. 99.999% availability means nothing if your mobile phone provider can’t connect your critical calls. Good providers will welcome a discussion about performance-based contract incentives and their typical client experience. The best will allow you to speak with a current customer and a past customer to get a clear perspective.
“We will respond to your support request in 4 hours.”
Do you want a response or do you want resolution? Most customers want a solution rather than a vague notion that their need is being addressed. Response times, particularly given the ability to automatically generate an email after a call or chat, are virtually worthless.
If you lose internet connectivity at your cultivation facility, what negative impact would that have on your business? How often does it happen? You do not need to make every issue or need a critical priority, but you do need to clearly define the top 10 needs or requests that you have to have addressed in an hour or less.
“We will digitally transform your business.”
Digital transformation is a vague concept, often deployed to give some razzle dazzle to a sales presentation. When you hear this used, your bulls**t detector should begin screaming. Sales demonstrations of this type often center around tool demonstrations or screen shares.
Stop the wasted time. Put the screens away. List the three or four goals that you are trying to achieve as a leader or business. Are you trying to increase yield? Are you trying to expand your grow to a new facility? Are you trying to prevent employee theft? Are you trying to increase security? Yes x 4.
Focus the conversation on how the provider has helped achieve those goals for similar organizations and companies. Understand their view of how people work. Solutions like Salesforce are flexible, but they assume that people work a certain way out of the gate. You need to decide if you want to use your process or the provider’s process.
For example, automating your warehouse may be a good idea, but if you have to buy 20 tablets to make a tool work, you have introduced additional work to secure the tablets, train the warehouse workers, and increase the WIFI bandwidth in the warehouse. You may eat up any potential return on investment by spending significant money and energy customizing and configuring a solution.
3. Incentivize Performance.
Once you have defined your target services and outcomes clearly, you should set standards for performance for each of your needs and services. Technical support, network connectivity, sales management, security continuity, fleet management, inventory reconciliation, and cash audits are all common needs. Good providers will have a list of metrics that they use for other clients to use as a starting point for you.
Fixed Price Contracts (or Contractors):
While you can plan a budget around contracts structured in this manner, you need to clearly define scope. When one of our staff used to work for a large outsourcer, every request would be considered an enhancement and require a high cost project team for several months.
Time and Materials Contracts (or Contractors):
These agreements allow you to pay based on your demand or need, but the vast majority of technology projects or initiatives come in over budget and late. If your estimate is bad, you end up paying more in the long run. Individual contractors looking for long term work often use this strategy to gain entry. Being clear with your process, goals, and metrics, as noted in “Use Plainspoken Language” above, makes revisiting performance straightforward and clear.
Value Based Contracts (or Contractors):
Agreements structured as value based contracts typically emphasize revenue sharing or cost reduction, with the provider or contractor getting a percentage of the growth or savings. These agreements can be powerful, but they require extensive information sharing so that the agreement is mutually beneficial. Furthermore, contractors often allow the provider to recover their costs, but they do not consider a cap for performance.
When I worked for another consulting firm, I served on a technology cost savings effort structured as a value based deal. The client had a poor understanding of their current state, allowing us to identify $100M in savings in the first 30 days. In the first month, we had effectively earned $10M, the entire budget for our services. We agreed to implement a performance cap to maintain a good relationship with the client, but they learned a valuable lesson.
Fundamentally, the business should drive technology, not the other way around. Nebulous, vaguely defined technology projects and contracts are a red flag. Rather than trying to make an agreement work, look elsewhere. There are a number of good, reliable technology partners that are clamoring for an opportunity in the cannabis industry. No regrets.