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Targeting an Under-Marketed Opportunity in B2B

How to find the end users and true decision makers hidden by the institutional purchasing process

by John F. Hood, President
MCH, Inc.
2009

Executive Summary
Government funded and other not-for-profit institutions account for one-third of the U.S. economy and are an under-appreciated segment of B2B. The people who deliver services in institutions are typically highly educated, highly paid professionals or skilled and well-trained specialists. It is the doctors and nurses, radiologists and lab technicians, professors and teachers, counselors and therapists, policemen and firemen, pastors and social workers who “do the work” of institutions and deliver services to their “consumers.”

An institution’s purpose is to empower these individuals to do their jobs. Empowering them means providing them the tools they need to succeed. Who knows what these tools are? The professionals and specialists know best. As in all professions, the practitioners are constantly educating themselves on the latest advances in the profession. They are the only ones who have the expertise to evaluate the needs of their constituents and choose the right products. In contrast to businesses, the purchase decisions are made closer to the bottom of the institutional organization chart. The rest of the organization is there to handle administrative tasks like providing the infrastructure and among other things, accounting for and issuing purchase orders.

From a marketer’s standpoint, the upside-down nature of decision-making at institutions makes life very difficult. The decision makers with whom marketers want relationships are hidden behind the formality of institutional finance departments and purchase orders. Tracking the origin of orders is very difficult. Where in a business environment it is often possible to identify a sole decision maker, in an institution one may have to reach out to many and still also rely on the fact that peer groups of professionals communicate a lot among themselves. Because decision maker names are often not available or not easily identified on purchase orders, many don’t appear on response databases. Marketers who primarily rely on response databases are unintentionally doomed to underperform in the institutional market.

The more you understand the differences between business purchasing and institutional purchasing, the more you will be able to understand where and by whom purchasing decisions are made and how to take full advantage of this unique, big, and fast growing B2B market segment.

Introduction
Institutions are different than businesses and their differences make it harder to identify the decision makers who ultimately choose your products – or not. The institutional world is characterized by information and solution sharing in contrast to the competitive nature of the business world. The sharing happens both within and among institutions. A second characteristic of institutions is that many are staffed with college-educated professionals at many levels. Think of the staff at hospitals, colleges, and schools. A third characteristic is that institutions are provided money from a variety of sources (but generally not from the sales of products or services). The funds are provided for specific purposes, and the institutions are held accountable for using the funds for those purposes.

Add these characteristics together and you get a different type of purchase decision-making than you do in business. Let’s think about a typical larger business. The business is organized into departments, and the department manager gets a budget and is accountable for it. If he/she makes a purchase, the invoice comes to the manager who approves the invoice and forwards it on to accounting for payment. If you are the seller, you know who your buyer is. In smaller businesses, your buyer is most likely the business owner. Note: we are not discussing the purchasing or merchandising departments that purchase raw materials for manufacturing or inventory for resale. We are discussing the buying of less specialized products that are commonly sold through direct marketing.

Now let’s look at an institution. A professional somewhere in the organization wants to make a purchase. He/she may discuss this with colleagues in the same department or others and build a consensus. Consensus building is more frequent when the product cost is higher. A purchase request or requisition is submitted to the purchasing/accounting department. The purchasing department encumbers (reserves) the funds and issues a purchase order to the vendor. When the goods are received, the purchasing department approves the invoice and pays it from the reserved funds. The name on the PO is the purchasing manager rather than the person who chose the product. If you identify the purchasing manager as the most important contact in an institution, you are on the wrong track. Note that these professionals are trained and interested in their professions, not in the more business-like arts of purchase negotiations, shipping, and contract law.

The average institution is bigger than the average business and most encompass many layers and divisions of labor. What are the implications? Even though institutions are likely to be some of your best customers, you don’t know who the decision-maker is. You can’t identify the buyer using a purchase order. The decision-maker may be buried deep down in the organization. Several individuals may be involved in the decision, and you don’t know who carries the weight. To succeed in institutions, you need a different strategy than the one you use for businesses.

The challenges arise from the fundamentally different characteristics of institutions: their sources of funds, their organization structure, and their staffing characteristics. As we discuss these subjects, we are going to quote from the new faculty guide website of the Eberly College of Science of Penn State University.

Funding at Institutions
Where do institutions get their money? They don’t sell products and services like businesses do; they get their funds from a variety of other sources. Typically one of the largest sources is a transfer of funds from a governmental body; other sources are contributions, endowments, fees, taxes, tuition, grants, and bequests.

One of the challenges in administrating the funds is that they have strings attached. The money must be used for the purposes for which it was provided, and institutions must be able to account for their spending from each source. Consequently their accounting and finance systems are set up to control spending. There is tight control over what funds are used to purchase products, services, and even salaries and other operating expenses. For example, the Boston Public Library has more than 100 separate funds, some quite small, and each must be used in accordance with its own restrictions—an administrative and accounting headache if ever there was one. ¹  These conditions make the finance office very powerful but only in the administrative sense. They make purchasing rules that all employees must abide by, but they normally don’t make the decisions about what to buy or who to buy it from. ²

You can identify the way institutions account for spending in the purchase orders you receive. It is common to find:

• a fund number or account number that the purchase will be charged to
• the only personal name on the document is the name of the purchasing manager, and
• the PO directs invoices to be sent to a different address than the shipping location.

From the standpoint of trying to identify the decision-maker, the ship-to address can provide clues. The ship-to, however, might be a receiving department or warehouse so one should not just assume that ship-to addresses are a reliable way of identifying the buyer.

The Purchasing Manager Versus the Purchase Decision Maker
When the purchasing department or manager (organizationally part of the Finance Department) gets a requisition from an employee and the requisition meets the administrative requirements (within dollar limits, appropriate fund source identified, adequate funds available), a PO is issued. The purchasing department is not charged with identifying products or vendors except in specific situations. Examples of those situations are 1.) when the dollars exceed a limit, three bids may be required; 2.) there may be a preferred vendor and/or a contract covering commodities like stationary and office supplies.

The process works like this: When the requisition is approved, the money from the correct funding source is encumbered. ³ Encumbering the funds means the cash is moved from an “available to be spent” category to a “ reserved for a purchase category.” The purpose of encumbering funds is:

• to make sure the money will be available when the invoice is received,
• to make sure the same money won’t be spent twice,
• to make sure that the finance department can demonstrate that the money was spent on appropriate products or services if it is audited, and ⁴
• so the finance department knows how much money is left as the fiscal year or funding cycle draws to a close.

This process has three important consequences:

1. The purchase decision maker (who fills out the requisition) must know the price of the goods so the correct amount of money can be encumbered. In order to get the right price, they must specify the product or service precisely and choose the vendor.
2. Encumbering the money means the vendor will be paid; in other words there is no credit risk. Encumbering funds can happen only when the money is already in the bank or the checking account. Institutions can’t spend money they don’t already have.
3. “Use it or lose it.” One of the great opportunities in the institutional market is the end of the fiscal year. If the funds available are not spent, they must be returned to the provider. Generally, that also carries the message that the amount of money available was greater than needed and future funding will be reduced. Institutions have strong incentives to spend their funds completely, and one of the functions of the Finance Department is to notify decision makers how much money they have and by when it must be committed or spent.

You can see that this process creates lots of bureaucracy or red tape. One solution institutions are using with increasing frequency to simplify the process is to issue credit cards to their employees. ⁵ Credit card limits are then used to control the spending. When a purchase is made through a credit card, the vendor is probably interacting directly with the decision maker or someone very close to the decision maker. These customer names are important to capture.

Who Makes the Decision?
One of the characteristics of many institutions is that highly educated, highly paid, and highly skilled individuals are at the lower levels on a traditional organization chart. They are the ones actually delivering the services. Doctors and nurses directly interact with patients. Professors and teachers interact with students. In contrast, in the typical business organization, the highly educated and highly paid individuals are found mostly in management, at the top of the organization chart. The individuals delivering the services tend to be less well paid and less well educated. Think of restaurants, manufacturing plants, distribution industries, agriculture, and mining for example.

In an institution, many of the administrative departments are there to serve or enable the front-line professionals. Many of these professionals receive ongoing continuing education to maintain their professional standing. They are aware of new trends including new techniques and the products or services that are required to implement them. It is these front-line professionals who identify the needs of their constituencies (patients, students, etc.) and decide what must be purchased.

Often the front-line professionals have their own budgets or funding. They have complete discretion with regard to these funds within the guidelines of the organization. The funds can be very small, a few hundred dollars to quite large, upwards of $100,000. Regardless of the amount of money at their disposal, the professionals will still have to abide by the procedures of the institution. Where they have institution-issued credit cards, there are likely to be limits to individual purchases, typically around $1,000, and monthly limits. Purchases outside those limits would go through the requisition-purchase order system. ⁶

Once a large purchase decision is made, the Finance Department may respond administratively:

• Does this request compete with others for limited funds?
• Can we raise the funds from a donor or a grant?
• Are multiple bids required?
• Do we need to include this request in next year’s budget so adequate funds will be available?

Note that these questions are not about the worthiness of the purchase. The professionals have to make that call because they are the ones trained in the discipline. The objective of the organization is to find a way to get them what they need.

Multiple Decision Makers and Purchase Size
In a department of peers, say cardiac surgeons in the cardiac ward, nurses staffing an assisted living facility, geographers in a city geospatial office, IT professionals in the IT department of any sizeable institution, or teachers teaching the same grade or subject, all but the most trivial, personal purchases will be discussed among the peer group. Many of the purchased items will benefit the group and a consensus will form. In most cases, one individual will be the promoter of the idea or purchase, and there is no way to know whom without being present.

The higher the value of the purchase, the more likely and necessary is the consensus building. For instance, the purchase of a major piece of equipment or the remodeling of a department would have to be agreed on by the majority of staff. It would also probably need to be its own line item (entry) in a forthcoming budget. If substantial enough, the purchase would be approved by the Chief Administrator and possibly the governing board. If the purchase needs to be budgeted, the decision will have been made and costs determined months before the PO is issued. Institutional purchasing departments will not issue POs until the funds are in the bank which means that even though a decision has been made, the PO won’t be cut until the start of the new budget year (fiscal year).

If the purchase is so large as to be outside the realm of “normal” funding and the institution is committed to it, they will attempt to raise new funds. Fund raising can take the form of higher taxes, a bond issue, a search for sponsors or large donors, or a full-fledged fund raising campaign. This is where the development and public relations offices become vital. Obviously, the purchase cannot be made until the funds have been acquired. ⁷

There are three categories of purchase size that are helpful in thinking about your marketing approach. These categories vary from institution to institution, of course. They are small, up to $5,000; medium, from small to $25,000 or $50,000; and large, above $25,000 or $50,000. ^{8 9}

Essentially, the purchase size determines when in the fiscal year the purchase decision is made. The timing of the decision determines the marketing and contact strategy. Small purchases may be made anytime. A big opportunity also occurs in the last quarter of the fiscal year when the organization scrambles to use any unspent funds. Many small purchases of “want” items rather than “ need” items will be bought then.

However, if the purchase is in the large category, the decision might well be made before the fiscal year begins. Why? Because institutions will include those large items in their budget requests. If the request is approved, the money will be forthcoming when the next fiscal year starts; if not approved, the item will be dropped from the budget. This means that the selling job happens before the budget is put together. The purchase decision is made when the item is included in the budget request. If the budget is approved, the purchase order will be released sometime after the beginning of the new fiscal year when the money has been provided.

An institutional marketer needs to know to which purchase category(ies) their products belong and what the organization’s fiscal year is; only then can a well-thought out marketing and contact strategy be implemented.

Importance of Fiscal Year
The institution’s fiscal year has a strong influence on purchasing. ¹⁰ As above, large proposed spending items in the new budget (beginning of the fiscal year) tend to be issued in the form of the PO at the beginning of the fiscal year. Purchasing within pre-authorized limits may go on at any time. There are also normal or institution-specific buying windows such as Christmas and Easter with churches and the August and September back-to-school buying.

The most important, however, is probably the period just before the end of the fiscal year. This is when the “use it or lose it” mentality takes over. Use it or lose it means spend the rest of your budgeted money or you have to give it back. If you have some to give back, it means you didn’t need it in the first place. You are likely to find an equivalent sum removed from your upcoming budget, a double penalty for not spending. So, counter to all the incentives in the business world, the incentives in the institutional world would have you spend every last nickel.

This phenomenon typically occurs in the last three months of the fiscal year. If there is a prime time to get your offer in front of institutional buyers, this is the time. The left over money can be quite substantial as some of these institutional budgets are in the hundred million to billion-dollar range. ¹¹

Response Tracking and Analysis
The institutional purchasing practices described above make it very difficult to identify the decision maker(s) behind the POs you receive. In fact, it may be impossible. Some decision makers prefer to remain anonymous, hiding behind the purchasing office to avoid being pestered with sales calls.

Nevertheless, it is important to get as close as you can. Pay attention to the POs, in particular, the ship-to addresses. Look for things like:

Ship to:

Hospital Receiving
123 Main Street
Anytown, NN 09876

Attn: P. Smith or,
Notify Allison

P. Smith or Allison may well be the requisitioner or decision maker. You will want to capture those names in your internal databases. Just be careful not to save lots of data indiscriminately that may only be purchasing department personnel or receiving departments.

Another thing worth doing is to aggregate purchases at the ship-to level (if not a warehouse) or secondarily at the bill-to address. Even if you cannot identify decision maker names, you know the importance of the institution at that address. You can use that information to drive your marketing and sales strategy by knowing how much investment you are willing to commit to maintain or increase revenue there.

What to Do
I think it is now clear that institutional decision-maker names are elusive. You probably have some on your customer file, but you probably have some finance/purchasing/receiving office names too. Other available response files will have the same problem. This means that if you rely only on your customer file or response files to market to institutions, you are leaving money on the table.

Dedicated institutional marketers have known this for years. They rely on compiled databases to make sure they reach all the potential decision-makers that they can afford to. And they use their house files also. But here is the rub with compiled databases. They probably have more names available than you can afford to use. What to do? You can intentionally under-mail and rely on pass-along effects. Within limits, that can work because the institutional environment is so collaborative. Of course you would need to test some under-mail formulas to see what works best for you: every fifth name at a location, every third name, a cap on the number of pieces, etc.

A more sophisticated approach would be to analyze your institutional customers and identify the types of institutions that buy the most from you. Then you can sensibly acquire more names at those places and less at others. A strategy like this might require you to integrate the compiled names with your house file(s) both to do the analysis and then implement the resulting tactics. Compiled institutional databases tend to make this more difficult than with a business database because of the multiple names, institutional attributes, and matching issues. You need a skilled marketing database solution, either internally or outsourced, to do this job right.

If you can’t identify the decision maker but need to maintain contact, there are several techniques. A field sales person can make face-to-face inquiries – that is if they don’t already know the decision maker having sold to them before. That takes time, and for the reasons above, there may be more than one individual or a committee who need to be contacted.

If not face-to-face, telephone inquiries can help. You may not reach the busy professional who may be with patients or students, but you may be able to identify them by asking clerical staff questions like: “Who is responsible for deciding which widget to buy?” You can then direct a sales person or send direct mail to the individual.

In a direct mail campaign, you can address a piece of mail to a title slug “Buyer, Widgets” and hope the mailroom passes the piece to the appropriate person. There are also mailing lists of professionals and department heads that are even more likely to pass the information on if they are not the right person. What you are doing is taking advantage of the non-competitive and collaborative attitudes in institutions where information sharing is very common.

The Eight Lessons to Remember to Take Full Advantage of the Institutional Market:

1. Institutions are a large and important part of B2B
   Institutions are one-third of the U.S. economy and are growing faster than businesses. All general B2B marketers participate in the institutional market, but many market to institutions in the same way they market to businesses. Those marketers are leaving money on the table, missing a great opportunity for more growth.
   
   
2. Institutions make ideal customers
   If you were to describe an “ideal” customer, would it look like this? Would your ideal customer be growing, stable, recession-resistant, larger than average, with no credit risk? You have just described an institution.
   
   
3. Institutions are different than businesses
   They don’t “sell” and they don’t have sales departments. They get money from governments, contributions, and bequests. They are purpose driven, not profit driven. They have incentives to spend, not to save. Purchasing decisions are made by the professionals who are delivering the services of the institution, the doctors, nurses, professors, teachers, counselors, pastors, librarians, etc. Institutional purchase decisions tend to be made towards the “bottom” of the organization chart where business purchase decisions tend to be made near the top.
   
   
4. The institutional Finance Department makes the rules but doesn’t decide what to buy or from whom to buy it
   Institutional professionals, the purchase decision makers, have lots of discretion in making choices. They are the experts in their specialties and only they have the detailed knowledge to specify the equipment, products, and services they need. They can spend lots of money without higher-level approval, but they must abide by the institution’s established process and the restrictions of their funding sources. They may purchase directly using institution-issued credit cards.
   
   
5. Purchase size and fiscal year determine marketing strategy
   The funding cycle influences the spending cycle. Small purchases may be made any time, but larger ones will take time. If large enough, some purchases will require their own line items in the budget meaning the costs and vendors will have been determined before the start of the fiscal year. The PO will only be issued when funds are available after the new fiscal year begins. It’s important to take advantage of the “use it or lose it” mentality in the last quarter of the fiscal year, particularly for small purchases.
   
   
6. Decision maker names are missing from response files
   The purchasing manager who signs the purchase order is not the purchase decision maker; he/she is an administrator who manages the process. His/her name should not be captured as the customer because they will not respond. (You may want to make sure that the purchasing staffs at customers’ institutions have a copy of your catalog, but it would primarily be used for reference.) Because the decision maker’s name may not be available on the purchase order, it can’t be captured and won’t appear on response files.
   
   
7. You need compiled sources to find the decision maker names
   If you can’t find the names on response files, you only have one choice: compiled databases. But how do you know which names are the ones to contact? Institutional employees tend to share information which can help spread your message. Many employees have their own funds and may act individually and idiosyncratically. Since there are many possible decision makers at most institutions, the contact strategy you choose should relate to the potential of the institution. If high, market to many; if small market to a few. As an example, the Mayo Clinic in Rochester, Minnesota, is $6 billion in size and employs 30,000 people. Don’t market to just one person there.
   
   
8. The marketing database solution you choose has great leverage over your results
   You need the capability to identify and the attributes to prioritize your institutional customers and prospects. You need to be able to integrate compiled names along with customer names and other data sources such as response files. Whether in-house or out-sourced, you need a database partner who understands what you are trying to do and who has the data and tools to get you where you want to go.

Glossary of Institutional Terms
Endowment: The capital that provides income for an institution.

Encumber: To reserve the money that’s been promised to pay so it’s not spent elsewhere.

Fiscal Year: A twelve-month period for which an organization plans and reports on the use of its funds.

Government sector: The entities that collectively provide public services which are mainly non-market in nature, mainly for the collective consumption of the community, involve the transfer or redistribution of income or are financed mainly through taxes and other compulsory levies.

Grant: Funds given to tax-exempt nonprofit organizations or local governments by foundations, corporations, governments, small business and individuals. Most grants are made to fund a specific project and require some level of reporting.

Inter-governmental transfer: A transfer of funds among or between different levels of government

Line item: An itemized appropriation that appears on its own line in the budget.

Not-for-profit institution: Any public or private, nonprofit organization that 1) is organized under state or local laws; 2) has no part of its net earnings inuring to the benefit of any member, founder, contributor, or individual, and 3) is neither controlled by, nor under the direction of, individuals or entities seeking to derive profit or gain from the organization.

Requisition: A form raised within a department containing the details of a proposed procurement action that includes provision for appropriate funding.

Use it or lose it: Managers of funds are required to spend their allotment within a fiscal year or they permanently lose the right to use the money. Managers who don’t spend their complete budgets risk the very real possibility that the next year’s budget will be cut.

Click here to view a sample requisition form.

1. "XX XXX XX LL YYYYY
   
   The X’s represent a 7-digit number, called the budget number, which identifies your department. LL is a 2-letter code which gives your campus location. And the Y’s represent a 5-digit number which is the fund number. If the funds in question are general funds (University source of funds), then the fund number is always 10010.
   
   Each grant or contract awarded in the college is assigned a unique fund number.
   
   A separate 'checking account' will be opened for you for each source of money that you have."
   
   New Faculty Guide
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2. "It continues with the proper utilization of funds in accordance with the following three tests: 1) expenditures must be allowable under the terms of the award; 2) expenditures must be allocable to the purposes of the award; and 3) expenditures must be reasonable."
   
   New Faculty Guide
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3. "The accounting reports that the University systems generate are very much like the bank statements that you get for your personal checking account. The one main difference is that the University systems know when you have written a check but it hasn’t cleared yet. The situation is called 'encumbered funds.' So, for example, funds will be encumbered at the point a purchase order is submitted."
   
   New Faculty Guide
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4. "A number of federal regulations and University policies govern financial and program accountability on grants and contracts. It is important to remind faculty to take the utmost care in providing the proper stewardship over all their sponsored funds."
   
   New Faculty Guide
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5. "In order to buy anything…, you must either use a purchasing card (for small infrequent purchases), use a standing order set up by our purchasing department, or go through the purchasing department. No university employee may purchase anything directly."
   
   New Faculty Guide
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6. "If you are buying a piece of equipment or significant amount of supplies, you will use a Purchase Order to make these purchases. Once the purchase order is placed, your account reports will show the total amount of money that was on the purchase order as encumbered funds. Once the materials are received and the bill is actually paid, your accounts will show that the money has been expended (spent)."
   
   New Faculty Guide
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7. "…all proposals for funding submitted to external sources by faculty and staff, and all awards of grants, contracts, cooperative agreements, other funding arrangements with outside entities that are associated with these awards (such as matching) that are made to the University by external buyers, sponsors, or donors, must be processed as a sponsored project through the office of sponsored programs, as a gift through the development office, or through one of the other Controller-approved mechanisms."
   
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8. "Competitive buying is not required on orders from $0-$4,999. Purchases $5,000-$24,999 will go through a competitive pricing process unless the requisitioner provides justification that a specific manufacturer or brand of product is required. Purchases of $25,000 and up require a formal bidding process by Purchasing Services."
   
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9. "Policy…governs the use of the purchasing card. Certain purchases are not allowed, such as: services, rentals, memberships, live animals, travel expenses (with the exception of airfare purchased from approved sources, etc.)
   
   The maximum transaction limit is $2000 per transaction, $18,000 per day, and $18,000 per statement period…"
   
   New Faculty Guide
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10. "However, the University systems only show appointments to the end of the person’s official appointment, to the end of the fiscal year, or to the end of the grant whichever comes first."
    
    New Faculty Guide
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11. "…but it can be a big problem at the end of the grant when you are trying to spend the last little bits of money without over-running your account.
    
    We titled the section above 'Getting to the Bottom Line' because knowing what you have left to spend is so important."
    
    New Faculty Guide
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