A Race to the Bottom on Price
In recent years the trend in the outsourcing market has seen a race to the bottom on price. Certainly in the public sector this is due to austerity, as public sector entities were pushed to cut costs ever deeper.
But it’s also in part due to the culture of some aspects of how public and private sector organisations treat outsourcing today. The immediate impacts of this are often service quality, care and innovation. The longer-term victims are those suppliers that have collapsed under the strain of ever-narrowing margins and ever-increasing commitments.
We’ve written extensively about the need for clarity, understanding and collaboration in your client-supplier relationships. Never has that been more important than in an era when your supplier may feel obliged to cut margins to the bone to win business or be silently struggling against mounting financial worries.
In such an environment it’s vitally important to build deeper, stronger, more informed supplier relationships. Undertaken correctly, these usually foster mutual commercial trust where supplier and client can work together more openly. The results will not only achieve the agreed outcomes of a project, but also the betterment of their ongoing working relationship on successive projects.
Challenges in Building Commercial Trust through Collaboration
However, for anyone managing a complex service relationship, you’ll know from your own experience that building those closer working relationships can be far more difficult than you originally imagined.
There could be trust issues, egos and commercial aspirations standing in your way. But, if managed appropriately with consistency and direction, the rewards can be significant.
Evidence from in excess of the 500 complex relationships we’ve helped to optimise, provides six foundational steps to building deeper supplier relationships in complex projects:
1. Understand your supplier as you understand yourself
Through understanding your suppliers at a deeper level – knowing their culture, how they work, what motivates them, what their goals and aspirations are and so forth, you will be able to understand where issues and opportunities lie to support you in generating better outcomes.
Evidence teaches us that the longer you work constructively in an open and collaborative relationship with suppliers that provide complex services, the better the chance you have of getting to know them. Through this, the closer you are likely to become, the easier it will be to appreciate what motivates them to achieve the right outcomes, and what is likely to distract them from your preferred destination.
In essence, the more deeply you work with these strategic suppliers, the easier it is to work with them, to spot issues at a distance before these become real problems that will derail your relationship. Making a concerted effort to understand your supplier at a deeper level from the outset helps you to get to that point more quickly, and with this newfound knowledge, to make better informed decisions in the relationship and to influence greater productivity.
2. Leverage supplier competitiveness
The opportunity of competition is sometimes misunderstood to be solely around price and competency at the procurement stage. Evidence teaches us it’s not just at the procurement stage but, in fact, competition should be an ongoing process, looking for opportunities to optimise complex services during the life cycle of service delivery. Keeping your suppliers focused on consistent optimisation has many advantages in managing your relationship and the outputs it drives.
There are many industries in which supplier relationships are looked at on a longer-term basis. Suppliers compete for a contract; sometimes, a small project to start off with to give them an opportunity to prove themselves and for both parties to get working experience of one another’s capabilities and capacities.
If they do well, this often leads to them being trusted on larger and more complex projects. By this time, if you have already developed an understanding of one another’s working practices and workforces, progressing your working relationship on a larger project should be a smoother affair.
The flip side of that particular coin is that suppliers that don’t do well on a smaller project are unlikely to be successful in their bids for larger and more complex services.
This may all seem familiar, with competitive optimisation often stopping after procurement. Your supplier may well, as a result, sink into the comfort zone of knowing they will be working with you for the many years that your contract is with them.
But this default method of inviting supplier complacency does not have to be the way. Competitive optimisation can be extended throughout the working relationship you have with your supplier. In some industries, clients provide visibility of the overall project portfolio to the suppliers, evidencing the scale of the relationship and what it could be worth to them.
The understanding being that only if they push innovation and do a good job will that count towards them being considered for wider involvement in further complex service delivery. This encourages suppliers to continuously evidence their worth through the quality of their work. Suppliers that listen, that are adaptive, that find innovative ways of solving problems, will clearly be given the chance to widen their involvement on more projects, further perpetuating the right behaviours in your relationship.
You can take things even further by splitting a project out into a number of parts and giving them to different suppliers to work on to generate a constant air of competition. This requires greater procurement resources and wider ICF supervision, but throughout the project all suppliers will be aware that there are others working with the same client who could take their place should they not perform. Our evidence of this happening demonstrates that the additional procurement and management challenge this creates often results in significantly more innovative solutions and engaged suppliers.
3. Responsive supervision of suppliers
While trust is an important commercial asset, it needs to be earned and maintained and that’s where responsive supervision comes in. Supervision in this sense is not about overseeing and guiding – it’s about the way you handle issues when they arise and the impression this leads to. It is about efficiency and responsiveness – evidencing that you are on the ball.
Set your suppliers quantifiable objectives, milestones, KPIs, and monitor them. When deadlines are achieved in advance, reward, recognition and widening of projects to be delivered will help you gain better optimisation. Conversely, if deadlines are missed, immediately look to identify why (as a lack of immediacy leads to the impression that schedules are ‘optional’) then rectify the matter expeditiously.
If your supplier is unable to explain why a delay/overrun/issue has occurred, it may be appropriate to offer to assist in their investigation so together you can find out where the problem exists and the supplier can solve it so it does not hold everyone back in future.
Collaborative working is a fundamental part of the supervision process – monitor progress, respond immediately to delays or issues, collaboratively determine solutions – and together you can develop the systems and solutions that could drive both organisations forward.
4. Develop compatible and complementary processes
Moving beyond an understanding of one another, it’s also important for you to appreciate the nuance of your collaborative relationship – you need to speak each other’s ‘language’ to ensure that information shared between you and instructions passed down are not lost in translation. This will minimise the chances of misunderstandings occurring that might send one party off on a totally different trajectory to the other.
Jargon, colloquialisms and the way you present your requests and expect them to be executed need to be understood clearly by both parties.
As an example, car manufacturers Toyota and Honda took this to another level many years ago when they initiated a guest engineer programme. This required their first-tier suppliers to send several supplier-side design engineers to work alongside their in-house engineers to understand the car manufacturer’s development process at a deeper level. This was not a superficial act: it was a two to three year programme, because they appreciated that to develop a truly solid partnership with their suppliers they needed to be invested in their development and growth, in parallel with their own development and growth.
5. Strategic information sharing
It’s important to find the right balance of information to share with your suppliers. Too much and you could overwhelm and give away far too much commercially sensitive data. Too little and you could make the supplier feel less like a partner in the process while also missing out on opportunities that could have manifested with a more open approach.
Finding the right balance of information to share and your approach to sharing will often drive your relationship forward in a very positive direction. Sharing information will make your supplier more engaged in the relationship, help them to identify opportunities for optimising processes, developing innovative concepts and encourage a greater openness in your relationship which will create a more successful partnership.
But it’s also the way you share this information that sets the right environment for the relationship. Intensive, structured and planned information-sharing sessions set the scene for a structured governance approach throughout.
6. Collaboration leads to innovation
We’ve outlined a lot about developing the right kind of relationship which encourages the right kind of behaviours. In this case, it’s fostering the drive and the dedication in your supplier to go above and beyond for you, to commit resources to innovate.
If your supplier asks for your help or is struggling to determine the origin of an issue that’s holding things back, if they are interested in developing innovative solutions to finding better ways of achieving stated outcomes, it’s important that they recognise that you wish to collaborate with them.
It’s also critical that the desire to collaborate is seen to be led from the top and owned by a senior executive. The senior executive doesn’t have to be ‘in the detail’, but they do have to be regularly visible, so that the supplier knows you take collaboration seriously and that they can informally escalate behavioural issues to the responsible executive without fear of recrimination.
Separately, offer to share resources to initiate and support innovative activities which in the end will make the process of working together more efficient and addresses issues and challenges in service delivery.
Share best practices and reward innovation because after all, the stronger your relationship is with your supplier, the more cost-effectively they can deliver the right outcomes, faster.
Those best placed to lead the charge in relationship building are those in your organisation who are closest to their supply-side counterparts.
While helping our clients to develop stronger more successful working relationships with their outsourced partners, we often recommend developing their internal team of individuals. You’ll probably know them as your client development team, client management team or ICF (Intelligent Client Function) team.
This is a select group of individuals chosen from across a variety of departments for their specialist knowledge of both project and objectives, technical skills and market appreciation. They are your front line, your relationship litmus paper, driving deeper understanding, building stronger relationships and encouraging longer lasting more impactful collaborations.
Creating deeper supplier relationships is an important strategy for long-term outsourcing success.
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