The (lost) art of the deal in today’s market

December 2, 2001 By    

As new generations of marketers enter the playing field, it brings to mind some of the valuable ideas passed down to my generation when we entered the energy industry. I learned the business from grandfathers, uncles, brothers-in-law and a father involved in this the “old school” way of business transactions. The way deals are structured today and the lack of supply and risk management information shared with clients is very different – different than even five years ago.

I’m talking about the “Art of the Deal Structure.” The art is not practiced by many in the trading and marketing community today, as their agendas have been set by senior management. Conversations about family and birthday cards are practiced by just a few from the old school; most of today’s trad-ers know little more than a clients’ customer numbers.

Nothing wrong with customer numbers. Numbers, computers and high-tech software provide the trading and information advantages that allow me to make money for my clients. But I also enjoy hearing about their families, interests and, naturally, their business plans.

Commodity trading firms have spent incredible amounts of money to build vast, high-end computer trading units. Most of these firms would rather trade financial instruments like options and swaps (paper) than deal with physical trades. The volume that can be traded in paper is anywhere from three to 10 times that of the physical trade.

Mega-volumes traded at even lower trading margins have financial engineering experts constantly looking to create new products for their marketers to use.

But these expensive Internet trading sites, intended to be marketing tools, are becoming stand-alone business units with high overhead costs and thin margins. Eventually, these expenses will bring the consolidation of many high-cost trading sites and companies.

It’s interesting to study how deals are structured today, given so many transactions now occur on Internet trading sites and other over-the-counter markets. Many large commodity trading houses and energy marketing companies are set up similarly to investment banks in Europe. Though many of the organizations have been flattened, there are still many energy companies, trading houses and marketing firms that have numerous vice-presidents and layers of traders with back office support. Sometimes the back office support to trader ratios are as high as 4:1 to 6:1.

Firms set up in this fashion have very aggressive traders who are well compensated to work everyday for a particular goal: Churn money, make Wall Street happy and keep their jobs for another day. Buzzwords like “Contact Management” and “Marketing” help them build their universe of clients.

Customer service is preached, but seldom truly practiced. Deal origination fees and deal premiums (the juice that motivates traders) drive most organizations. It is sometimes easier to deal with another company than argue over who made the deal, earning the origination fee.

Look for a propane supplier who helps you understand the best possible option for you when you decide to manage your price risk and supply loss exposure with physical or financial products. A good supplier will analyze using current or future production for your supply portfolio, or should know if you’d benefit from buying the barrels in the market. Is it more economical to buy supply today and incur the necessary carrying costs, or should you buy out-month product to save money?

Your supplier should be your advisor, helping you understand the ramifications of your supply agreement. When a refinery or gas processing facility has problems, you need to be prepared so you don’t have to scramble out to the spot market to find propane and transportation.

Such are the results of a deal built by an Artist. It involves reviewing a client’s marketing plan to understand what he or she wants to accomplish. It is awfully hard to guess correctly how to supply propane from primary and secondary supply points without understanding the client’s goals.

A true Artist will read your business plan and fully appreciate where you are taking your business. Risk management plans can be layered over existing supply plans, but price risk exposures can be better hedged if the two plans are developed together.

I have been fortunate enough to work with very good managers and leaders, and most of what I’ve written in this piece was passed on from the Monets and Picassos of the “Art of the Deal Structure.” Finding a true Artist can be difficult, but you’ll feel the benefits of discovering that person all the way down to your wallet.

Does your supplier practice the art, ensuring you are positioned as soundly as possible on every deal you make? Find out.

By the way, how is your family doing?

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