You have to admire Sir Richard Branson’s team at Virgin Trains. As widely reported last week, they have, along with their joint venture partners Stagecoach, pulled off a great deal to extend the West Coast Mainline franchise until March 2017 with an option to extend by a further one year.
Two years ago the picture looked much different as First Group briefly won the rights to operate the line for 15 years and it took a legal challenge to overturn the decision. Since then, the Virgin/Stagecoach joint venture has been running the franchise for a modest management fee of 1%.
The new deal is based on a risk and reward mechanism. If they can increase passenger revenues and manage the risks then all parties will benefit. Damian Brewer of RBS Capital believes that the new uncontested franchise award will triple their margin to 3%.
As you would expect, the deal hasn’t been welcomed in all quarters, however, when you examine the details it is clear that the negotiators have struck a balance that provides benefits for most stakeholders and that is enough for the government to justify the award.
In return for the new contract, Virgin and Stagecoach have agreed to convert 21 first class carriages, creating 5,500 additional standard class seats (a net gain of 2,200 seats), spend £20M on station upgrades, spend approximately £5M on improved catering and train interiors, provide free Wi-Fi in stations and better coverage on trains and also launch new services from Shrewsbury and Blackpool. In addition to all of those customer benefits, the JV has also agreed to pay the Government £430M to run the service. Just as importantly it gives the Government breathing space to get their act together before the franchise is bid again in 2 to 3 years time. They simply cannot afford another fiasco!
So what can we learn from this?
Firstly, you need to take the initiative with your existing clients and explore the possibilities of renegotiating your existing contracts. Even contracts which are currently not that profitable can be made more profitable with the right deal.
Secondly, you need to be creative; you need to make the deal attractive for your client. Everything is potentially negotiable and you need to come up with ideas and proposals which provide real benefits and reduce risk for your client. If you can find a neat solution that does this and at the same time provides an opportunity for you to benefit as well then you are half way there.
Thirdly, you need to work closely with the client to prepare a robust business case to justify the new arrangement to their stakeholders. There will be many sceptical people who will criticise the deal, saying that it is unfair, anti-competitive and does not maximise the value for money that a competitive process would generate. You need to have counter arguments for all of those.
Fourthly, you need to get your own house in order; ensuring that the service you are currently providing is at least satisfactory and free from any controversy. No-one is going to extend a contract with a supplier who is not performing. If there are any issues, you need to address them before you enter the negotiation.
Interestingly, the East Coast Mainline franchise is due to be bid this autumn, apparently using the same risk and reward mechanism used in the renegotiated contract for the West Coast Mainline. Guess who is in pole position? The Virgin and Stagecoach JV have a head start in not only understanding the new arrangements but in demonstrating that they can make it work. Nice one Sir Richard!