The scope of this white paper is supplier relationship management.
The aim of the white paper is to explore the negotiated collaborative supplier relationship. This description is suited to a subset of strategic suppliers where the relationship has been jointly created in an intentional, behaviours – driven manner.
Each organization may have its own terminology, but the relationship features are common.
The first element of the negotiated collaborative relationship is the “negotiated” part. The relationship has been designed by the relationship contributors in a formal, considered way. The contractual, performance, and behavioural parameters are aligned, agreed and documented.
Secondly, the negotiated collaborative relationship is characterized by its collaborative nature. Multi-functional team work, transparency of information and problem-solving activities are the norm between the buy-side and sell-side.
The white paper will explore the reasons why such a relationship may be considered, what is required to resource these relationships and what benefits they can offer the buying and supplying organizations.
1: Why choose a negotiated collaborative relationship?
A negotiated collaborative relationship is a model where buy-side and sell-side representatives agree to a team-working style. It is a resource intensive but high-reward approach that is only possible with a small number of relationships. Collaborative suppliers are typically formed with strategic vendors where:
- The supply market has little or no credible alternatives, and / or:
- Quality failure relating to purchase presents a significant risk to safety, security or reputation and the likelihood of detecting an incident before it occurs is low, and / or:
- There is greater benefit to both parties through a collaborative relationship compared to one that is characterised by leverage-type behaviours (a tactical relationship).
The relationship is chosen because it is evident to both supply side and buy-side parties that there is significantly more value available from this type of relationship than a traditional buyer-supplier relationship and it is therefore worth the additional effort.
Figure 1: How buy and sell-side expectations differ for supplier relationship types
|Tactical Relationships||Negotiated Collaborative Relationships|
|Focus on price not total relationship cost and value
Performance management is about earned value – doing what the contract says in exchange for money
Value-shift – “if you have more, I have less”.
|Focus on total relationship value from multiple perspectives – financial, sustainability, business development etc.
Performance management is about team problem solving and generating ideas to optimize the relationship outcomes
Value create – “let’s grow the team benefits”
|Bargaining-style behaviours – if you do this, then I will do that||Team working behaviours – When we achieve this, then we will benefit in that way|
Collaborative supplier relationships are typically borne out of commercial necessity rather than sentiment. They are not a soft option and will seldom present an easier management task than tactical suppliers.
2. How is the Negotiation Collaborative Relationship formed?
The relationship may be established at any time throughout the life of the total relationship. It could be at contracting stage for a new supplier, or mid contract for an established one. For incumbent suppliers, it is likely that a new commercial framework will need to be set up that reflects the new dynamics in terms of performance management, compensation and commercial outcomes.
Expert supplier managers never allow supplier relationships to elide from tactical to collaborative. It is always intentional and negotiated in the same way that a commercial agreement is discussed. Such discussions look at three aspects of the relationship, all of which have commercial implications – thinking, practices and behaviors.
Thinking: the relationship strategy – why do both parties want this, what do they hope to achieve from it? Incremental financial reward, reputation, risk management, business development sustainability and quality improvement are all potential aspirations. This requires documenting and revisiting just as much as the legal agreement.
Practices: the relationship tasks – how will the outcomes be achieved and when? The tasks, responsibilities and approach should form the basis of regular discussions and meetings, rather than routine performance management.
Behaviors – this is both the style and the associated behaviors to be adopted. They will be applied consistently during contract management, performance challenges, solving problems and addressing reward and sanction.
Internal stakeholders must be part of agreeing these elements with the supplier because they will often be the main party who is implementing them on a day to day basis.
3: Brainstorming in strategic supplier relationships
Brainstorming ideas for improvement should be an expected, routine part of the negotiated collaborative relationship activities. This could occur during regular online meetings or face to face reviews.
The usual brainstorming rules apply – all suggestions are positive, worthy of compliment based on the effort made to devise them, and worth discussing. The more ideas, the better. Most importantly, the supplier should feel that the more input they have to the idea’s generation, evaluation and execution, the greater the chance of success. It is the buyer’s job to make that statement the truth by appropriately resourcing the selected ideas through senior sponsorship, motivation and appropriate commercial response, if appropriate.
- Be shared (or not) between the buy and sell side in whatever split matches the relationship goals
- Be proportionate to the return
- Allow enough emotional distance that if it fails, it does not damage the relationship or belief in the concept of continuous improvement.
If either party does not appear to be engaging with the problem-solving approach to the previously agreed extent, the reasons should be discussed. It may be an institutional issue (e.g. my boss won’t sanction this) or it could reflect an unwillingness to make personal change by the account manager (it inconveniences me). It is the buyer’s job to enable problem solving and tackle these challenges with the cross-organization team.
Whose job is it to generate ideas for improvement? Both parties, of course. But if the expectation is for the supplier to propose more ideas, then it is only fair that buyer should contribute a higher level of enthusiasm and personal commitment for attainment of the goals. As long as everyone on the team is inputting something – expertise, resource, insight, or excitement. It all has value for relationship quality.
4: Managing power imbalance
Many strategic relationships take a vested relationship model, where negotiation is left behind as “old-style” thinking. However, the main difference in a negotiated collaborative relationship is that that it doesn’t matter if there is relationship imbalance between the parties.
Negotiated collaborative relationship are not equal relationships.
Problem solving and creative thinking are required by all parties, but not necessarily in the same proportions.
In fact, it is may be a healthy thing to acknowledge it and to build a relationship that uses that imbalance as a source of strength. It is not so much a “partnership” as a “dynamic”.
Many elements could contribute to a sense of imbalance. It can be a cause of frustration in strategic relationships that our partners are not “treating us well”. This can be driven by many issues, for example:
- Capacity or capability gaps
- Fit of relationship to business goals
- Friction between personalities
- Company culture or application of leverage behaviours
The negotiated relationship occurs when the parties agree that it will help the relationship and its outcomes better if one of them is the “driving” party and the other is the “supportive” party. This power dynamic might be temporary, or it could mark the entire character of the partnership.
This does not reflect a sense of precedence, superiority or intellectual dominance. It is just an acknowledgement of what will be effective for everyone. Once it is negotiated, a framework of practices and behaviors can be established that match the agreed style.
This example shows how a negotiated collaborative relationship might operate with an imbalanced approach:
|The Driving Party’s Responsibilities||The Supporting Party’s Responsibilities|
|Working with the supporting party to identify their capability gaps and improve those that would benefit the relationship outcomes.||Taking responsibility for the root causes of capability gaps and doing things that eliminate barriers to improvement.|
|Assigning tasks to the supporting party that help them to grow.
Asking the supporting party to identify the ways that the driving party can be a better relationship leader.
Being forgiving of the supporting party’s failures and not giving up on them.
Finding alternatives to reward/sanction models that suit the dynamic.
|Accomplishing tasks agreed with the driving party without questioning their efficacy.
Assessing the relationship stewardship of the driving party and providing non-blame style feedback.
Loyalty to the supporting party commercially and behaviourally.
Demonstrating to the relationship leader that reward and sanction are not effective motivators.
When the team is balanced in terms of complementary skills, motivations and commitment, the source of these elements is irrelevant. The teamwork model of supplier relationships means that both parties accept that a negotiated relationship is appropriate. They then establish a suitable relationship style that helps to maintain the momentum towards the agreed relationship goals. That style needs considerable exploration to set up, experiment with and freeze.
5: Setting up a performance management framework
Negotiated collaborative relationships typically represent high risk, high spend suppliers. It makes sense that they would have a robust performance framework so that supplier managers can target and track outcomes. Yet performance frameworks are often not collaborative, by virtue of being:
- Based on buy-side business needs, not things that are important to the supplier’s business.
- Imposed, with first sight being at the competitive bidding, negotiation or contracting stages.
- Associated with sanctions (at the extreme, termination for breach of contract)
This is not in keeping with the interest-based negotiation that should accompany the launch of a strategic relationship. Realistically, negotiating the performance framework together with suppliers can sometimes drive the sort of defensive, cautious behaviours that are not collaborative at all.
Not having a performance framework is hardly an option: the business (and sometimes regulators) expect that relationships that could involve catastrophic consequences to safety or security must be monitored carefully. This often drives the use of performance motivators such as financial sanctions, growth limitations or some form of relegation in the buyer’s organization. Minor infractions that do not cause jeopardy may incur smaller negative consequences.
The thing is, suppliers have a choice about performance: either commit fully to excellence or decide whether the punishment for non-performance is worth it.
And it might be worth accepting the buyer’s sanction if
- A more valued customer needs the resource that is required to address the performance issue
- A new prospect or sale is diverting the supplier.
- The supplier deems the account not worthy of the investment, or nearing its end of life
Buyers get quite insulted by these sorts of excuses, but instead of foot-stamping, the buyer can remind the supplier that letting the team down damages the agreed relationship infrastructure. Buyers must also take responsibility for performance management and its associated behaviours. “Managing the KPIs” is not enough. Suppliers need
- Personal attention to issues that concern them such as payment
- An open channel to share feedback
- Reward for behaving within the agreed relationship style
Regular meetings, checking in to see how the agreement and the people are and deciding how to celebrate successes are all team activities that support relationship-building.
Performance frameworks usually involve punishment. Punishment of any kind can encourage “hiding the truth” in an effort to avoid the consequences. This secrecy does not suit collaborative relationships, and it can be a bold choice to avoid rigid performance measurement with strategic suppliers. If suppliers demonstrate that they need sanction (due to repeated breach of performance conditions), the relationship should be demoted in style back to the tactical model (e.g. you are not mature enough to work in the teamwork way, so we’ll have to build back up to it through practice).
6. Managing suppliers using behaviour modification
Most buyer are familiar with the concept of conditioning. It is about the use of messages and behaviour to create a desired perception in a current or prospective supplier.
It Is applied frequently during competitive bidding to enhance the motivation of suppliers to win or keep business and magnify their concerns about losing out on opportunities. This is a tactical use of conditioning because it is short-term in its focus and it is best suited to suppliers in competitive markets.
Conditioning is a form of behaviour modification that is just as important – maybe even more so – for strategic suppliers.
Behaviour modification of suppliers through buyer-driven initiative suits negotiated collaborative relationships, where a team work model supports strategic supplier partnerships.
For example, maintaining an upbeat, energetic tone underpins joint problem solving and continuous improvement. It demonstrates optimism that the team will find solutions together and overcome obstacles. It is the buyer’s job to drive this positive tone and monitor if it is being effective in contributing to the mutually agreed outcomes.
Where the supplier does not appear to be as proactive as the buyer would expect of a partner, the buyer will also use behaviour modification techniques, perhaps ignoring supplier behaviour that is unwelcome (where it is not damaging to do so) and praising any contribution made.
Just as the buyer needs to examine what motivates the supplier, the smart supplier will do the same of the buyer. Suppliers will consider whether behaviour modification would benefit the relationship and in what ways suppliers should seek direction from the buyer about how to challenge and change this.
For example, the supplier could be encouraged to ask the question “how does that meet the milestone set?” if the buyer reverts to a price-focused discussion during a review meeting. The total cost implication could be relevant, but price-talk tends to be tactical in its intent. Nagging to remind us of how we agreed to behave is 2-way.
7. How to set up the negotiated collaborative relationship
If you have decided that a teamwork model is correct, it is useful to start the meetings with a session dedicated to documenting the reasons for that assessment. Brainstorm why you feel this relationship is superior to alternatives or the other party offers more value than their peers. These are your relationship strengths, and they are what you can come back to in difficult times. They are also the foundations of your first initiatives. If you feel that the team has great cost analysis skills to customer service focus, use these themes as the basis of your first projects. This is also a good way of practising the skill of “letting someone else drive the bus” because you may need to hand over the wheel temporarily while the person who is most suited to take the lead at that time takes over. Resources are complementary in a team. Stick to your knitting.
Blame is not useful in buyer / supplier discussions. It is better to be effective than “correct”.
When a supplier is immature (but you have no choice but to use them), it is not useful to point out their deficiencies repeatedly. Instead, remind the supplier that they must prepare for the events where their gaps are likely to cause performance problems and get on top of that through regular self-assessment of capability and performance output. It gives the supplier time to review, risk-assess and respond.
The negotiated collaborative relationship is visible in many modern Procurement teams, often with other titles. When it is working well, it is a showcase relationship that demonstrates the value of team working. Power imbalances are not a cause of concern. It is the contribution of many different personalities and capabilities that is the source of strength, if they are utilized in a coordinated way in the relationship.
The style is a potential template for a greater number of suppliers, where the return on investment if evident for all parties.