Peter Moore on Pricing: What is “skinny dipping” in logistics negotiations?

While helping to lead a class in carrier costing and pricing at the recent SMC3 JumpStart Conference in Atlanta, I mentioned “skinny dipping” as a technique in logistics negotiations. This caught many attendees by surprise, and I was asked by several people to please explain what I meant by the term in the context of freight.

The term “skinny dipping” denotes a deliberate transparency in building the business case for a deal in an initial negotiation meeting. Both parties, starting with the shipper/buyer, need to clearly define their real business needs—or the end goal—of the proposed relationship.

As the shipper/buyer is in the power position, they go first. Disclosure of the compelling business case that would make the new contract successful might be “to beat inflation by 2%” or “to enable the company to be successful against competitors in a tough market.” Another I’ve heard is “we need assistance to open a new geographic market with extraordinary service.”

In this process, the shipper/buyer discloses details of the operations and the factors that could limit carrier efficiency. Telling potential carrier partners what the strategy of the company is and, if possible, the honest budget for the services required helps the service provider to know what the real end game is for success.

The carrier/seller then strips away the black box in which they typically hide margins, real capabilities, capital needs and tolerance for risk-taking. With the real costs and strategy exposed, the carrier/seller also discloses their profit margin requirements and their needs in balancing their network. They explain how the shipper’s freight fits into their operations and which areas would have to be subsidized—as perhaps they don’t have backhauls in that geography.

The parties discuss possible innovations that could improve service and costs and together they decide whether the two companies really have a fit. The understanding being that both have to achieve their business goals to sustain the relationship over the long run.

If innovations require new capital, then it’s critical to understand both parties’ tolerance and ability to invest in equipment, people and process change. Such clarity is critical to avoiding disappointment early on in the new contract. Studies have shown that the main reason for early termination of logistics contracts is a shortfall in performance verses expectations.

Yes, “skinny dipping” can be risky. There’s a chance that there isn’t a good fit between the parties. And, of course, it’s always better to find out up front that it won’t work rather than disappointing customers and failing in a key business initiative—a situation that can be career limiting.

So, what’s different about transparency? It’s fundamentally different than traditional “just give me your lowest price” approaches to buying from logistics service providers. Past cases detailed at vestedway.com illustrate the improved success rate of transparency, and my own experience bears this out.

In several cases, service providers admitted that they were not able to do what the shipper really needed. And in other cases, service providers committed resources and discussed the willingness to take on risk to support the shipper’s goals.

Collaborative contracts start with collaborative behavior in negotiations—and these negotiations start with full disclosure.