Before 'Price Negotiation': What IT Outsourcing Company Presidents Must Face Regarding the 'Substance' of Sales and Cash Flow
Introduction
'Since raw material costs have risen, we are raising our prices.'
In the manufacturing and logistics industries, this movement toward 'price pass-through' is currently accelerating.
The latest survey indicates that the overall price pass-through rate has reached 54.2%.
Hearing this, do you think, 'That doesn't apply to us because we are an IT outsourcing company'?
In reality, this wave of 'price pass-through' is a crucial management turning point for IT outsourcing companies as well.
However, this is not simply about 'raising unit prices.'
It is a deeper opportunity to re-examine the 'structure' of your own business.
1. The 'Raw Materials' of IT Outsourcing are People and Time
IT outsourcing does not have obvious raw materials like steel or fuel as in manufacturing. However, 'costs' definitely exist.
Personnel costs for engineers
Outsourcing costs to partner companies
Direction time spent by PMs (Project Managers)
Usage fees for development environments and AI tools
Personnel and outsourcing costs, in particular, are the largest costs in IT outsourcing.
And, inconveniently, these payments often occur 'before' the sales revenue is received.
If you chase only sales while overlooking this, you will fall into a negative spiral where 'you are busy but have no money left.'
2. 'Unit Price Negotiation' is not 'Asking for a Price Hike'
Many executives tend to view 'unit price negotiation' as a 'pushy request for a price increase' or a 'confrontation' with business partners.
However, true unit price negotiation is a dialogue to organize whether 'continuing this project will allow the company to operate without strain'.
What needs to be reviewed is not just the amount (the numbers).
Payment timing: Can you get paid before paying your subcontractors?
Acceptance conditions: Are there ambiguous rules that delay payment?
Additional work: Is it becoming unpaid labor under the guise of 'service'?
Down payments/Installments: Is the contract structured to cover upfront costs?
Organizing these points is not about blaming the other party, but rather 'confirming how to continue working sincerely while maintaining quality.'
3. Before Filling the 'Hole' with Loans, Look at the Bottom of the Bucket
When cash flow becomes tight, you might consider loans (borrowing).
Using loans as 'working capital' to bridge the gap until payment arrives as projects increase is by no means a mistake.
However, you must be careful because while loans bridge the 'time lag,' they do not fix 'low gross margins'.
The unit price itself is too low
Additional work is not being billed
Payment terms are so long that cash flow is constantly short
If you take out a loan while leaving these 'structural defects' unaddressed, there is a risk that your management will become even more difficult once repayments begin.
4. 'Project Sorting' that the President should do right now
There is no need to panic and think, 'The world is in a mood for price pass-throughs, so let's just raise our prices for now.'
First, start by calmly 'sorting and looking at' your company's projects.
Which projects are generating profit?
Which projects have outsourcing costs paid upfront, putting pressure on cash flow?
Which projects involve unpaid additional work that consumes the time of the president or PM?
Numbers are merely results.
Only by unraveling the 'structure' that produces those numbers one by one can you make calm management decisions, such as 'should I raise unit prices,' 'should I change payment terms,' or 'should I bridge the gap with a loan.'
Summary: 'Judgment Criteria' for Sincere Management
Increasing sales is a wonderful thing, but not all sales are created equal. If your team is exhausted, you are chased by payments, and the president is constantly anxious, you should feel uneasy about the 'substance' of those sales.
Line up your current projects and write down the timing of cash inflows and outflows, gross profit, and repayment amounts.
That small act of 'visualization' will be the first step toward transforming your company into a stronger, more sincere organization.