What’s Tiered Contracting?

A couple weeks ago we mentioned subcontracts – specifically Tier 2 and Tier 3 relationships.

A Little History Back in the 1980s, when we started our business, our model was direct sales to technical buyers who needed consulting resources.  Our first engagement involved converting an international conglomerate’s Domestic Order Entry System from Autocoder (a very early computer language) to COBOL. Part of the sales process involved convincing our client that we had the technical capability to understand their problems.  While we still provide similar services, the business model has changed drastically as large customers began entering into management contracts with huge consulting organizations.  Five or six years later, the very large consulting organizations followed suit and established their own prime vendor programs. This placed two (and sometimes even three) organizations between us and our end client, creating a tiered relationship.

In our industry, the most common arrangement is a two-tier relationship.  This happens when the end client has one or more prime vendors and requires non-prime vendors to subcontract through a prime.

How Does This Help Me? One of the consequences of tiered relationships is the shared desire and responsibility for meeting diversity goals.  At every purchasing level there are diversity spend goals to be met. It works sort of like this: the end client has its own spending goals and so they request that their prime vendor(s) meet diversity spending objectives.  In some cases, the end client makes compliance with these goals part of the contract with their prime(s). The prime vendor will attempt to reach goals by using their existing suppliers first. If they are unable to, they will request that their suppliers assist in meeting their goals. In fact, many contracts have good faith efforts – to work with SDMWVBEs – written into them.

If you can’t establish a contract relationship directly with a client, discover who their prime vendor for your service or products is, and market your ability to help the prime meet diversity goals.  And, if you can’t work directly with the prime, keeping going and find the prime’s suppliers. Working the tiers gives you a chance to access work with your target client even if it is a step or two removed.

What Do I Get Out of It? Beyond the ability to make a sale and growth of your business, it positions your company in a relationship with your target customer.  When the customer revamps or updates its approved or prime vendor list, you’ll have earned the knowledge – and internal references – to compete for a position as one of those vendors.  Baby steps toward the ultimate goal is still forward movement.