What is commercial trust in strategic supplier relationships and is it important? 

By Allan Watton on

Commercial Trust in Strategic Supplier RelationshipsCommercial trust in strategic supplier relationships concerns the ‘on-the-ground’ behaviours of both parties. It exists when someone does what they say they are going to do when they say they are going to do it.  Commercial trust is mainly about the individuals in both organisations, who have the necessary values and a sense of higher purpose required to ensure the relationship can succeedOur experience of more than 500 strategic relationships informs us that building commercial trust is critical to their success. It enables people to address shifting realities in mutually beneficial ways, and in the process produce significantly better results than power-based relationships, which rely on rigidly enforcing contracts. 

The economics of the outside world are constantly changing, making it hard to pin down the outcomes your organisation is trying to achieve. It’s also increasingly difficult to envisage and capture up front all of the specifics you need to address in a long-term supplier relationship, especially one that includes at its core new and disruptive technologies and innovation to drive better service delivery and improved value for money. 

How Do We Know if We Have Commercial Trust in Our Strategic Supplier Relationship? 

Clients involved in complex strategic supplier relationships / projects often assume that suppliers will attempt to class misunderstandings over their expectations as ‘chargeable scope creep’. Conversely, suppliers often experience clients trying to class legitimately different requirements as ‘in scope’, to prevent further charges being leviedThis can promote distrust between the parties, creating the wrong environment and preventing the relationship from developing positively. 

If you suspect your organisation is operating with low trust towards its Strategic Supplier, and that the supplier is reciprocating with equally low trust, then undertake a short survey to get a feel (and some basic evidence) for where the relationship currently stands.  

What is Commercial Trust in Strategic Supplier Relationships? 

Commercial trust concerns the on-the-ground behaviours on both sides of the strategic relationship. It exists when someone does what they say they are going to do when they say they are going to do it. For the ‘battle-scarred’ and experienced contract managers amongst you, who have been on the wrong side of a relationship with a manipulative partner, the concept of ‘trust’ will be hard to accept. Based on some of the vendor relationships that we’ve been involved with, we would agree with you. 

There are times when you have to wonder what is in the mind of a Strategic Supplier when it’s clear it is manipulating the relationship to its own ends. Often, Strategic Suppliers would say the same about their clients. What is clear is that manipulative behaviour won’t help them or you to drive innovation and get to the real business outcomes you need to achieve, or to maximise value from the project. This means that you need to force yourself to take a step back, particularly if you are more experienced in dealing with relationships of this kind. Building trust works, if it is done correctly.  

How to Build Commercial Trust in Strategic Supplier Relationships

Many organisations have successfully implemented trust-based initiatives and relationships, aligned with an appropriate balance of powerbased contract management. There are three key aspects to developing commercial trust with your Strategic Supplier: 

  1. You need to start from an assumption that most people are good and, therefore, trustworthy. Taking this step will open up a world of possibilities. 
  2. Starting with a propensity to trust doesn’t mean you should trust everyone. After you’ve done your commercial trust analysis, you may conclude that someone should not be trusted. But if you lead with distrust, you won’t even see the possibilities.  
  3. Commercial trust involves your personal judgement. It’s based on what your instincts and evidence tell you about someone’s motives. Commercial trust is a competency and a process that enables you to operate with high trust in potentially low trust environments. It helps you to minimise risk and maximise possibilities. 

It’s important to note, however, that commercial trust is not a substitute for high expertise in complex strategic supplier relationships/projects. The two go hand in hand. Commercial trust encourages the right behaviours, so you achieve the maximum value from a well-managed contract. 

Commercial Trust Analysis 

Commercial trust is not ‘blind trust’. You need to carry out a reasonable amount of due diligence to ensure your trust is well placed. Your commercial trust analysis should cover three areas: 

  1. Opportunity – What are you trusting someone with? Is it for them to come up with a key strategy? Resolve critical problems? Manage a critical project? Assessing an opportunity is simply a matter of identifying what it is that you’re taking on trust. 
  2. Risk – To trust is to take a risk, but so is to distrust. The objective of commercial trust is to manage risk wisely and to extend that trust in a way that will maximise value in the relationship. To manage this, we need to evaluate the degree of risk involved. This requires us to know the possible outcomes, their likelihood, and their importance and visibility. 
  3. CredibilityThis comes down to the character and competence of the people involved. Extending trust is sometimes a leap of faith. In making that leap, it nevertheless pays to exercise due diligence in ascertaining the credibility of the people or organisation involved. If their credibility is low and the risk of extending trust is high, you may decide that it’s smarter not to extend trust. Or you may choose to extend trust cautiously, believing that this will help the person or organisation to increase in trustworthiness, step by step. 

Overall, commercial trust is mainly about the individuals in both organisations, who have the necessary values and a sense of higher purpose – in other words, high moral values. If you can’t identify those individuals within both organisations, or your early experimentation with trust-based initiatives doesn’t work, then you’ll need to stick to a power-based relationship, where contract interpretation and draughting are key. You will, however, miss the many powerful benefits of commercial trust, which are described below. It’s also worth noting that Strategic Supplier contracts can be fraught with complexity, are sometimes based on inaccurate and variable costs, as well as inaccuracies in perceived service delivery levels; they may also have ambiguous draughting and incomplete terms.  

Why Does Commercial Trust Matter So Much is Strategic Supplier Relationships?

In our experience, commercial trust powerfully affects an organisation’s reputation, its ability to partner and collaborate with others, its capacity to innovate, its ability to attract, retain and engage great people, and the speed at which it can execute all these aspects of success, plus many more. 

Thought leaders who deal with complex Strategic Supplier Relationships/projects now understand that implementing and practising commercial trust is a major ‘currency’ in its own right. It is fast becoming a fundamental basis upon which people start, or continue, Strategic Supplier Relationships/projects. 

Strong commercial trust between the client and supplier drives the risk-taking that leads to innovation and progress in innovation led ventures. When trust rises, the speed of achieving benefits goes up and the costs go down. People can communicate faster, collaborate better, innovate more and do business more quickly and efficiently. The Covey Leadership Centre calls this the ‘high-trust dividend’.  

Benefits of Operating Commercial Trust in Strategic Supplier Relationships

Research shows that organisations that adopt a trust-based partnering approach have much more positive relationships with their suppliers than those that choose a power-based approach. 

The financial and operational benefits of driving commercial trust across both organisations can be significant and provide compelling evidence for investing significant effort and resource. For example:  

  • A survey in association with the London School of Economics showed that clients in supplier relationships with strong commercial trust incurred up to 40% less cost to reach significantly higher organisational outcomes. 
  • Gartner Research showed that in major enterprise software partnerships that lacked trust, the client was likely to invest up to double its anticipated spend in end-to-end costs of operating the service. Despite this additional investment, clients were also likely to fail to achieve their original business outcomes within two years. 
  • The stress of being a service user in a dysfunctional strategic relationship means that staff turnover in departments that are involved with the service, is likely to be 55% higher than in organisations that have strong trust. While staff turnover might not form part of your personal KPIs, the cost to your organisation is likely to run into many millions of pounds. 
  • Research from the Covey Leadership Centre indicates that organisations that operate with ‘positive intent’ (i.e. commercial trust) towards their strategic partners have significantly lower costs and higher margins and revenues than their sector peers. 

Want to Learn More?

If you want to learn more about how to build commercial trust with your strategic suppliers, speak to someone at BPG – we’re experts at optimising strategic supplier relationships 

Call us on 0845 345 0130, email advice@bestpracticegroup.com or schedule a confidential chat directly with an expert here.