Getting Pricing Done with Jesse Finch Gnehm of GE Oil & Gas
What do pricing initiatives look like at GE Oil & Gas Subsea Systems? Who contributes to those pricing decisions? How does the pricing function fit within the larger organization? What pricing decisions does the pricing function directly engage? What techniques and tools have been found useful for pricing at GE Oil & Gas Subsea Systems? And are there any external resources that they have found particularly useful?
I sat down with Jesse Finch Gnehm, Global Pricing Leader of GE Oil & Gas Subsea Systems to learn. What follows is an abbreviated transcript of our conversation.
The Value-Based Pricing Journey
WJ: Where is GE Subsea Systems in the pricing journey toward Value-Based Pricing?
JFG: In January 2013, I came to GE Oil & Gas Subsea Systems with a clear mission: establish the pricing function within GE Oil & Gas and evolve it on the pricing journey,
When I first arrived here, the culture surrounded cost-plus pricing like a lot of industrial businesses are. Making that transition from cost-plus to value-based pricing, from both a cultural perspective and a systems and infrastructure perspective, has been my focus for the last two years.
WJ: The value-based pricing journey is known to engage culture, process, and inter-organizational coordination. How did you approach this shift?
JFG: The culture piece comes from three different areas. First it comes from leadership at the top. I have really good support from our CEO Rod Christie, [CEO of GE Oil & Gas Subsea Systems] who sponsored our work in the first year quite visibly, and that set the tone. The second thing for us is having regular pricing reviews at both the Subsea Systems-level as well as within the various P&Ls that make up our business. And then the third piece of that is training the people. We have a pretty developed training program with both online learning modules as well as instructor-led training to ground people in pricing theory, and practice within GE Oil & Gas as well as within Subsea Systems itself.
When it comes to the process and infrastructure, we have taken a modular approach going P&L by P&L. We will start with a pricing diagnostic, or audit. The audit examines the process and infrastructure, includes an in-depth analysis around past deals and transactions. This process develops an understanding of where the gaps are and quantifies the value of closing some of those gaps. And we have also been slowly building up the team in each of those different P&Ls to put a pricing resource there that owns and drives those changes in process and infrastructure.
So we have talked about culture, we have talked about process and infrastructure and we get to that last part, that team piece. Really, we are a very small central team trying to support pricing decisions being made within the P&Ls, and also within our regions. Because we are very much a global business with commercial operations from Singapore all around the globe back through to Houston, trying to make sure we are aligned to supporting those pricing decisions. [Those] being made by people who might not have pricing in their title but are getting support, either through the development of new processes and tools here at the headquarters level or actually with the hands-on support of a pricing resource to help guide them in how they set pricing strategy, how they set prices, and then how they monitor the execution after the fact.
Context of Subsea Systesm within GE
WJ: How does pricing in the Subsea Systems fit within the larger GE context?
JFG: [When approaching] GE, start at the highest levels. GE, the 100 billion dollar-plus business that has a number of major businesses underneath it: GE Aviation, GE Capital, GE Energy Management, GE Healthcare, GE Home & Business Solutions, GE Transportation, GE Power & Water, and GE Oil & Gas. Within GE Oil & Gas you also have a number of smaller businesses that run somewhat distinctly. Subsea Systems is one of those six major businesses within GE Oil & Gas.
WJ: Within GE Oil & Gas, how do you work with pricing leaders in the other business units?
JFG: There is a lot of collaboration and best-practice sharing across the different businesses within GE Oil & Gas, and the Center of Excellence that Frederic Duhamelle [Executive Pricing Leader, GE Oil & Gas] leads at a headquarters level is at the center of helping to facilitate that.
The Center of Excellence around pricing supports each of the businesses as they execute pricing diagnostics and different initiatives. The pricing leaders in each of the businesses is connected to our executive pricing leader from a matrix perspective.
We have regular rhythms and meetings where the various pricing leaders and pricing team members from across GE Oil & Gas get together on a regular basis to talk about best practices, track and measure our performance as GE Oil & Gas, and to help build and elevate the level of pricing as a function within GE Oil & Gas.
Then if you step up to a higher level, there are a number of different initiatives that are trying to bring together our pricing resources not just across GE Oil & Gas, but perhaps collaborating with our counterparts in Transportation or Power & Water and some of the other businesses as well. So while the formal relationships tend to be held within GE Oil & Gas, we also do a lot of collaboration and best practices sharing at a higher level — with some of the other GE businesses that might not be as directly apples-to-apples comparable to the business that we do within the Oil & Gas sector.
Pricing Community Cultivation
WJ: And how is the pricing community within Subsea Systems being cultivated?
JFG: I’ve got the direct team that I am building out in support of our different businesses, but then we also have our commercial and sales team that we are trying to very much pull in and make a part of that pricing community.
The commercial people in our business are the folks who help negotiate the terms and conditions and refine the technical specifications alongside of our salesperson. Our salespeople might be viewed as a relationship owner. So where our commercial team often helps is where some of those pricing decisions are being taken, they might configure the quote and come up with and assess the different market dynamics that are at play.
We also partner with our friends in commercial finance, and marketing is a part of a lot of these initiatives as well.
So those are the folks who we are reaching out and delivering the online and in-person training to. We are trying to provide forums to talk about pricing dynamics within each of those different businesses as a part of our planning cycle, as well as providing some thought leadership.
WJ: Research by Homburg, Jensen, & Hahn indicates that the best pricing decisions usually engage sales, marketing, and finance. How does that relate to the way your decisions are being made?
JFG: It’s very representative of how we are trying to approach things. Pricing deals pull in our sales and commercial teams to make sure that we’ve got good insights to the competitive dynamics and the customer value drivers. We’ve got our finance team there to help make sure that we are making smart financial decisions for the business. We’ve got our marketing team there to help us understand how deals might fit into the broader market landscape. And then, because we deliver highly engineered solutions, we partner closely with our product lines. Our sales team can give us some of that, our commercial team can give us some of that, but the actual folks who understand the design and engineer those things can also do it. So, we are moving past just the sales, finance, and marketing teams to actually involve some of our product leaders in the engineering team as a part of our process when setting price for some of our larger deals.
Focal Contributions of the Pricing Experts
WJ: How does pricing contribute to these teams’ pricing decisions?
JFG: Pricing has people who are supporting each of the various businesses and the global businesses. But what we are very much trying to do is create systems and processes that empower the regions to be able to make those pricing decisions without having to come back to headquarters to talk about it. Now obviously you’ve got to have sort of a good exception management [price variance management] process with pricing. But our general approach is to (1) have pricing resources aligned to the business, (2) have regions bring major deals back to the pricing team from across the globe, (3) develop systems and processes that allow those regions to be more empowered going forward.
WJ: It doesn’t sound like you have a “command and control” role. It sounds more like you have a “develop and improve” role. Can you explain or expand on that concept?
JFG: Yes, that’s it, in a nutshell. We don’t tell the commercial and sales team—or the business—what the price should be. We work with them to help them come to an understanding of what the price should be through rigorous process and analytics in support of that. And often times we play a very facilitative role in helping come to those conclusions. As you can imagine, when you’re pricing large deals like we are talking about within Subsea Systems, that’s not a decision that any one person or department is taking on their own. But rather, it is much more of a collaborative process that needs good process and tools behind it, and some folks to drive it. At the end of the day, the business is making the decision on how to price things with our support.
WJ: Would you say you’re co-owning the decision?
JFG: No. What I would say is that the business owns the pricing decisions. What we’re making possible is to make sure that everyone has bought into that decision and that price point. We are driving a process where everyone’s bought into that price rather than just one particular team or function or person taking that decision on their own.
WJ: Another term I’ve heard in relation to pricing is driving alignment. Would you buy that one?
JFG: That one fits much more the culture how folks understand our approach here.
WJ: I have five different decision areas. I am going to start at the highest level, the competitive strategy area. Where you’re dealing with pricing in relationship to your customer strategy, your competitive strategy, and your corporate strategy. Do you find yourself contributing to those decisions themselves?
JFG: Yes. Pricing has meant having a good understanding of our competitive capacity; understanding how our competitors’ financial performance and strategic plans might affect their pricing behavior. We are very much a part of those conversations and bringing data to the conversation to help shape some of those decisions. I would say our marketing team is also very involved in that process in terms of helping understand the more strategic “where is the market going” side of the question.
WJ: Then let’s move on to the second level, the pricing strategy area where you’re setting the price structure, you’re determining whether or not you’re going skim neutral or penetrate, where your creating some sort of competitive reaction plan, if a competitor changes their price, how far will you go and how will you manage that variation. Is that an area where you participate?
JFG: Yes, we are very much driving the conversation with the business around those factors. I guess the one place out of that where we’re less involved is in the final scope of our offering. In our industry, how our products get packaged up is driven largely by the customer requirements. If a customer issues an invitation to tender, they’re going to say “I want a full Subsea production system that is going to include Christmas trees, manifolds, and control systems.” Well they’ve already told us pretty much what they want. Pricing is not going be involved in that. We will be involved in helping figure out how we are going to respond to those types of decisions. But in terms of setting the pricing strategy position, we’re very much a part of that.
WJ: The third level is with respect to market pricing. You’re working with the commercial teams to actually price these individual tenders. Is that correct?
WJ: What about price variance policy, the fourth level. Are you engaged in those decisions?
JFG: Yes, we will advise on those sorts of decisions. Though, because of the nature of our deals, it’s not discounting like you would typically think of. Though our deals are very large, sometimes the size of entire businesses, the number of deals accessible in our market is of small orders of magnitude. You don’t have thousands of transactions occurring and so it’s not necessarily feasible to set up a typical discount structure that a lot of people in pricing might think about. It is really about trying to get the right price for this particular deal and the competitive and customer value drivers around that deal.
WJ: Finally, the fifth level is price execution, which includes ordering, quoting, and billing. Does pricing get engaged in those sorts of issues? The actual processing of pricing?
JFG: Largely no. The way we touch the execution right now is we are trying to build up systems so that if somebody is in the tool that they use to price and generate a quote, that they’ve got, if it’s not a deal that’s large enough that’s getting direct support from the pricing team, that they’ve got some sort of analytics to help support them in making a good pricing decision. But you won’t find, generally speaking, a pricing person deciding the specific pricing parameter for a customer on this particular quote. Pricing touches it from a systems perspective and analytics perspective to try and support people who are actively setting and making that price and generating that quote.
WJ: Are there other levels that you and pricing touch other than the ones I just mentioned?
JFG: From a monitoring and key performance indicator side of things, we get involved in helping. We’ve got pricing metrics defined at a corporate level, and we’ve partnered with the finance team around tracking our performance and reporting and those things, and looking at how to improve the metrics we’ve got available to the team to help track our performance.
Pricing Analysis Techniques
WJ: In market pricing, research has shown that the best approaches usually engage in econometrics, conjoint analysis, or exchange value modeling. Out of those three approaches, which would you say most closely matches what GE Oil & Gas Subsea Systems needs to do?
JFG: If you have markets where you have few customers and complex offerings that have a high number of variables, you struggle to get value out of tools like conjoint analysis because you have a scarcity of transactions in the marketplace overtime. Trying to even generate the choices that you might evaluate would be difficult. And, because there are so few and transactions are such a high value, you would have challenges getting customer to participate in that sort of approach. The approach that tends to most lend itself to these types of transactions is modeling the value delivered to the customer and understanding our customer value drivers in depth, then track those over time and try to understand how customer valuation models give us a hint at how they might value different tradeoffs in our offering.
WJ: And with respect to price variances, do you find value in price waterfalls, net price bands, and price to-market segment studies?
JFG: For our large deals, these approaches don’t even start to make senses because really we’re trying to price a piece of business. For our parts business which tends to include high volume transactions, we look at net price analysis and pricing consistency and how that performs over time and by customer segment. But a majority of our business is in large deals.
Price Automation and Analytical Tools
WJ: Can you talk about software?
JFG: We are not currently using any of the traditional, mainstream, pricing software vendors right now. We are developing some tools for pricing analytics within enterprise level business intelligence tools. As we get more mature and further along in our pricing journey we’ll look to push some of our pricing analytics and tools into our configure, price, and quote (CPQ) tool
WJ: In terms of your analysis, do you find value in simple tools like statistical packages or graphical analysis tools?
JFG: The visualization tools tend to be the place where we are seeing the most value right now. Again, statistics are great when you’ve got enough data to push through it. But you run into a lot of N problems. If your N is a small order of magnitude, stats aren’t going to do a lot for you. So the visualization is a big and important piece for us. It makes the analysis tangible for people…they can consume it in a way that makes sense to them.
The overarching message is: when you’ve got high value, low transaction sort of businesses, that you solve the pricing problems there in a different way than you do for a high volume transaction businesses.
WJ: There are a number of associations established for serving the pricing community, are there any that stand out to you as being particularly useful?
JFG: Within GE Oil & Gas there is a large number of our team that are members of the Pricing Society and are CPP certified. It is a place where we’ve gotten a lot of value and support from some of the training and learning opportunities that are provided through both the CPP process and various conferences and other forums there. That is where most of our teams have had experience to date.
And, my team has attended a number of your Wiglaf Pricing seminars and follows the Wiglaf Journal.
WJ: Thank you, Jesse.