All that glitters is not gold Featured

8:00pm EDT July 21, 2002
At first, Ruben Melendez, president and CEO of The Glomark Group Inc., did not believe the wisdom offered by a fellow business owner five years ago. When it was reiterated last year by one of his advisory board members, however, he took the words to heart.

"Chris Campbell, a former executive vice president of ABB Inc., told me ABB never made money with the large companies-big profits," Melendez remembers. "The ones they made money with were the medium-sized companies, the $200 [million] to $800 million companies."

Campbell, a retired COO of ABB's Columbus offices who serves on Glomark's board, says the reason midrange companies net better returns is because larger companies use their power of negotiation, and price is usually the biggest issue.

"I found with the medium-sized companies, they were much more understanding that there was more to what they bought from you than the price," Campbell says. "If you served them well over the years, when they would negotiate with you, they would take that into account-that you did more than provide something for a price."

The ideal situation, Campbell told Melendez, would be to find a very small company that would appreciate Glomark's information technology consulting, training and software services-and would remember them later when the company became more successful.

Still, Melendez saw the success he was having with billion-dollar clients. ABB was, in fact, his first big fish, and soon after came Hewlett-Packard Co. That list eventually expanded to include Nationwide Insurance Enterprises, Microsoft Corp., Motorola Inc., IBM Corp. and others. Those clients helped Melendez's 7-year-old company grow to $1.3 million in annual revenues.

"I have benefited," Melendez says. "But if I would have put in my effort and done what I did with big companies with medium-sized, I would have been more successful. I would be bigger, and I would have less problems. I shouldn't say I regret it. I still do business with big businesses, but that's not our target anymore."

Getting an 'in'

Melendez founded his company in 1991 thinking he'd do business with smaller corporations-those with revenues of $20 million to $80 million. Most of the big fish, he figured, wouldn't care about him.

But smaller businesses gave him small projects and often didn't come back for more, so Melendez started to actively seek multibillion-dollar companies to join the couple of big-name clients that had already fallen into his lap. He used to work at ABB, so gaining that client was fairly easy. Hewlett-Packard bought his services after attending a seminar he gave in Columbus. The rest would take more work. In fact, it required a long, multistep process, Melendez soon learned.

First he had to choose his target. He wanted companies that were growing, that were purchasing new services rather than keeping a large internal budget for maintenance, and that didn't have complex layers of management and politics. He found such companies by doing research on the Internet, with industry experts and in trade magazines.

Then he had to find the right person within his target company.

"I would say there are two rules of thumb," Melendez says. "One is to think about what area in that organization could use your product. No. 2 [is] what person in that organization would personally benefit if he uses your product-meaning he is going to feel good because he accomplished results.

"In our case it's sales vice presidents of vendors of technology like Microsoft and, in the case of buyers of technology, we deal with the information systems group-the top person there, the CIO," he says.

And then there's the obvious: Find the person who signs the checks, but be sure it's the person who can sign for the full amount of your product. Some lower-level executives may not be able to authorize purchases above a certain dollar amount.

Name-dropping didn't hurt, either, in recruiting big companies. Without his references for work with ABB and Hewlett-Packard, Melendez says, he would not have gotten in the door with Microsoft.

Melendez's complex formula for attracting multibillion-dollar companies worked well, allowing him to recruit about 15 heavy hitters in five years. But the process was time- and money-consuming.

"We lost hundreds of thousands of dollars those first years," Melendez says. "We had to invest a lot to get to the big guys."

Hard lessons

Melendez fell into a trap he says is common for small-business owners who go after big clients.

When he gained Microsoft, he was so excited about the prospect of working with such a big catch that he put almost his whole 10-person staff on the project. In addition, Melendez personally was spending 80 percent of his time-including weekends and evenings-working on the account. Because of that, when other customers sought his services, he had to tell them it would be a few weeks before he could get to them-and they went elsewhere.

"If you're not smart enough to keep part of your time selling to other companies, if something gets pretty bad or goes sour with this big company and they kick you out, you are out of business," he says.

Melendez says once he was almost in that very situation.

"What you have to do about that is just tell them, 'I need some time.' Normally big companies say, 'I want it and I want it now.' You have to arrange your resources so you spread it over time," he says.

Melendez also learned, when seeking multibillion-dollar clients, that it helps to find another small business servicing the same account in order to learn how to do business with that company.

"The most important thing is the culture. If you understand the culture of an organization, you may be able to work with the organization if you can keep up with it," he says. "For example, at Microsoft they are very intense. So things have to happen very fast. When they ask for something they expect immediate response."

Another necessity in dealing with the big players: attention to detail, especially in payment terms and delivery policies.

For example, Melendez got burned several times before he learned the pitfalls of doing business with big companies that want him to do work in other countries. On at least one occasion, he gave the client a quote, delivered the service in the foreign country, and received payment of 40 percent less than what he charged. He later found that under the big company's rules, the buyer had to take its foreign rate of tax out of his payment.

"If you know that ahead, you can put that in your terms. You either raise your price or make the [domestic] company be accountable to you," he says.

In another case, which he declined to detail because of ongoing litigation, he signed a contract with a multibillion-dollar company after reviewing it with company executives-but not a lawyer. Now, he's fighting to win back his intellectual property-methodologies he provides in his training programs.

With all the investment and effort needed to work with larger clients, it's harder to make a profit, Melendez has learned.

"They bring the price down. They're tough negotiators. They demand a lot more. They have economies of scale to squeeze you," he says.

To prevent this, smaller vendors need to form a staff of both senior analysts and junior players to keep costs down, or else they need to specialize, says Michael Boster, chief information officer for one of Melendez's big-company clients, reSOURCE PARTNER Inc., one of the Borden family of businesses in Columbus.

"You've got to find a niche where there isn't a lot of competition," he advises. "Once it becomes a commodity service, it's a price game."

Melendez has also learned to avoid agreeing on a lump-sum price for a project. Now, he negotiates for a daily rate, or, if he must make a lump-sum agreement, he states the maximum number of days he will work before charging more or terminating the project.

A new perspective

Once Melendez tired of clearing all those hurdles, he decided to test the theory that midsized clients generate better profit margins. He quickly saw results.

"By experience we learned the sales process is faster; it's easier to access senior managers; they don't have big staffs so they can look to things outside; they are growing," Melendez says. "Since they're growing, they need help."

The process of recruiting clients in the $200 million to $800 million revenue range, such as software companies PLATINUM technology inc. near Chicago and National Computer Systems Inc. of Minneapolis, also takes less money.

"When you're calling on medium-sized companies, they even say, 'Well, let me come and see you.' But the big ones, generally they say, 'Well, if you want to do business for us, you come and visit us,'" he says.

Once he gets the work, Melendez doesn't have to discount his prices, either.

"For example, if I go to a medium-sized company with my training services, I could say, 'I'll send you a consultant at $3,000 a day.' They say, 'Fine.' But if I go to a big company, they say, 'All the consultants we hire we never pay more than $2,000,'" he explains.

At first, negotiating a lower rate seemed agreeable to Melendez because he knew big-company projects generally took longer, so he could gross more. But because such projects were larger, he often ended up needing more people and more time than expected, causing his profits to drop.

"Unfortunately," Melendez says, "very large companies are not good partners for small companies."

That's not to say all of his billion-dollar-company contracts have been headaches, or Melendez would have made the decision to change his focus years ago. The most important variable: people. Dave Foster, vice president and general manager for ABB Power Controls, puts pressure and demands on Melendez like most of the billion-dollar companies, but Melendez says he's fair.

"You go and say, 'Dave, we are not making money on this.' He'll sit down and talk to you about it. They will look for a win-win," he says, adding that he has had the same experience with Boster at reSOURCE.

"In the final analysis, no matter how big the item is that they're buying, people buy from people," says Melendez's adviser Campbell. "They look and see your product, then they're really looking beyond that, trying to say, 'Who's behind this, and are they really going to serve us well?' These days it's harder and harder to do that. So many big companies are merging, and at that point the personal side of it gets lost altogether.