Value-as-a-Service: the importance of strategic supplier management

We are in an everything-as-a-service era. The shift from product to service delivery originated in the B2C world, but quickly spread to the B2B world. For example, take the services provided by Spotify or Apple Music instead of consumers purchasing products like CDs, or the example of our being able to purchase Wi-Fi coverage instead of buying routers. As customers, most of us don’t want to think about what is necessary to get something done, we just want it done. Let me provide a common illustration. When you fly on an airplane you never have to think about procuring the plane, the required fuel, contracting a pilot, leasing runway space, adding food and beverage to the plane; instead you simply buy a ticket from the air carrier of your choice and board at the appointed time to get you to the scheduled destination.

Next to that, our perception of what is value also is changing – again, a clear result from what is happening in the B2C world. Companies like Amazon are really changing our baseline expectations of what value is. Within service management, customers don’t want to be put on a pedestal anymore. Instead, they want a service delivery that enables them to do what they are good at or what they are assigned to take on. To really delight customers we need more than SLAs and robust service catalogs, but we really need to deliver “value as a service.”

The shift from product to service delivery also brought an outsourcing shift along with it. When the shift to the cloud started, first the non-critical parts moved with it, but we’re now seeing more and more the strategic parts of our IT organizations being outsourced. So, the things we are outsourcing are changing significantly. These changes run the gamut of the organization, including infrastructure, software and even human resources.

To deliver value-as-a-service to your customers, strategic supplier management is crucial as suppliers are a very important part of the service chain. Here are some guidelines:

Define and structure

Not all of your suppliers will need strategic supplier management, so it’s important to define and structure them. I like to use the Kraljic purchasing portfolio management model for this, as is shown here:

Nancy Van Elsacker Louisnord

“Non-critical” items are typically things like stationary; “leverage” items are more expensive with a lot of suppliers, such as hardware; “bottleneck” items can be relatively expensive and have few suppliers, such as mail delivery; “strategic” items, such as software, have few suppliers and are actually pretty expensive — things provided by suppliers that you will likely not easily change.

This model enables you to decide how much time and energy to invest in the suppliers. It’s pretty obvious no one is going to invest a lot of time in suppliers like Staples and Office Depot for non-critical items; they are too low cost and provide too little value for your organization. Investing a lot of time in leverage or bottleneck item suppliers is too costly or doesn’t provide enough benefits.

For strategic item suppliers, on the other hand, it makes sense to invest more time as they are the crucial parts of your value-as-a-service delivery chain, especially because you are likely outsourcing more and more strategic items. These are the suppliers you want to focus on in your strategic supplier management.

Select and build strategic supplier relationships

When selecting strategic partners, you have to focus on more things than just price, product and service. Since you are going to build a relationship with them, that partner should fit in with your organization, have shared interests and, more importantly, should offer great added value.

Nancy Van Elsacker Louisnord

When building that strategic relationship there are three leading factors to consider: agreements, motivation and freedom. It’s where those three come together that we have meaningful partnerships. Creating a partnership is not about solely focusing on penalty clauses and contracts, but also on a joint motivation. In my experience on both sides of the contract negotiation table, I learned that watertight agreements and penalty clauses don’t always work best; they can actually turn against you. Asking for a fixed pricing agreement usually means the supplier is also going to put in very detailed and specific clauses about what is and is not included. What you get is no uncertainties with the level of service provided but also no flexibility either. This takes away freedom from both parties and motivation gets lost. A better strategy is to make the strategic supplier a real part of the team and actively work on knowledge sharing, understanding each other’s needs and working toward common goals.

With a good strategic partnership, aligning your internal SLAs to your OLAs will be a much smoother process because your supplier will feel more like an extension of your team than like an external party.

In this everything-as-a-service era, the focus on value has never been greater. Delivering value-as-a-service requires a well-connected chain where all the connecting pieces are equally important. A lot of these parts of the chain are focused on the customer experience and on the internal organization: company culture, mission, strategy, leadership and innovation, to name a few. Especially because we are outsourcing more of our strategic items, supplier relationships are a critical piece of the chain as well, and we do not always realize that enough. Since a chain is only as strong as its weakest link, it is important to attribute more of our focus and effort on the part of the chain that is about supplier relationships to achieve great value-as-a-service.