by Duncan Jones

How To Transform Strategic Supplier Relationships

Feb 15, 20126 mins
InnovationIT Strategy

Surveys reveal that sourcing vendor management professionals are dissatisfied with their strategic/partner vendors. Forrester has identified and outlines three characteristics that are key to transforming strategic supplier relationships from duels into duets.

Forrester’s conversations with clients and surveys with sourcing and vendor management professionals reveal widespread dissatisfaction with your most important vendors — the ones you call “strategic” and/or “partner.” They are the vendors receiving the largest shares of the client’s budget and should therefore be giving them the best possible commercial treatment and delivery service level. However, it’s safe to say that we see plenty of instances in which large providers are guilty of refusing to give money back when they’ve failed to deliver, or taking advantage of contract vagueness or loopholes.

As with many relationship problems, the friction between technology sourcing and sales professionals stems from a failure to communicate effectively. They use similar buzzwords when speaking to each other, but mean very different things when they use them. This failure to communicate is most damaging in the pivotal relationships that involve the highest expenditure, have the most potential to deliver business benefit, and are hardest to break when things go wrong. Traditional buyer/seller negotiations, in which the two parties focus on their respective short-term goals of savings and commission, are counterproductive for these partnerships because they create rigid contracts that cannot adapt to changing circumstances over time, as well as winner and losers on either side of the deal.

To explore prevailing attitudes to strategic partnerships with their technology vendors, Forrester asked sourcing professionals what they expect to get from such an arrangement and what they were prepared to contribute to it. Their answers revealed that there is no clear consensus on what sourcing pros expect so-called “partners” to deliver, and a reluctance to give them what they want in return. Negotiations therefore remain an adversarial buyer and supplier duel instead of becoming a mutually beneficial duet.

In order to transform strategic supplier relationships from duels into duets, you must first develop a common understanding, internally and with your key suppliers, about what it means to be strategic partners — what both parties want from the relationship, and what they’re prepared to give in return. To help you do this, Forrester analyzed examples of collaborative, mutually beneficial, successful buyer-supplier relationships, and identified three characteristics that are key to a successful partnership:

1. Trust is more important than contract clauses

In any partnership, whether business or personal, there has to be give and take if the relationship is to thrive. The customer inevitably relinquishes most of its transactional negotiation leverage (e.g., by granting some sort of exclusivity, so it needs to be able to trust that the supplier will not take advantage of any vulnerability. We found that most good partnerships evolved out of traditional trading relationships over many years, but that isn’t necessary if both sides have demonstrated their trustworthiness in other ways. For example, buyers can nurture and support the preexisting trust by creating a high-level charter that documents a mutual understanding of what the partnership means. Relationship managers will use this charter to guide subsequent discussions. The charter is less than a complete contract but more than an executive handshake that leaves subordinates in the dark about what exactly their bosses agreed to.

It’s also ok to allow for some uncertainty as to how you will resolve unforeseen problems. Stuff happens, but partners work together to overcome setbacks instead of arguing over legal liability. Don’t try to add a watertight contract to the partnership charter because that will merely drag you back to being adversaries. Many strategic partnerships don’t have a contract at all, or if they do it is there only as a last resort should a split be unavoidable.

2. Co-innovation delivers more than either party could have created by itself

Quality and service are important, of course, but mere suppliers can deliver those. Successful partnerships involve something extra, something that enables the customer to leap ahead of its competitors. This usually comes from the two parties sharing ideas, combining their technical capabilities to solve the customer’s business issues, and producing solutions that are better than either one could have invented by itself. Some firms say they want to co-innovate but really mean that they want their provider to miraculously come up with a breakthrough by itself. Instead, your organization should invest time, energy, intellectual property, and trust into the partnership, so you want to pick the business issues or opportunities that most deserve that attention. Many of the complaints Forrester hears from clients about their vendors’ lack of innovation relate to nonstrategic service lines that were inappropriate targets in the first place. Programs that provide differentiation, improve customer satisfaction, or enhance business agility are better candidates than utility IT services.

3. Shared goals, risks, and rewards drive good behavior

This is often the hardest best practice for procurement professionals to embrace because they begrudge suppliers for making a profit that they assume is at their expense. However, you need a new type of commercial model that ensures that their profit comes from your success, not from overcharging and underdelivering.

Once you have identified where and with whom to partner, you need to create a commercial structure that focuses everyone on one set of program objectives. This isn’t simply about outcome-based bonuses (although these are indeed a vital element); it includes the creation of a deeply ingrained culture of doing everything possible to achieve the program’s goals. Both parties must have a clear understanding of the business goals, how the program will help achieve them, and what you will use to measure that achievement.

Ultimately, you may have to accept that some of your powerful, embedded suppliers that you currently call strategic, with whom you spend the most money, and on whom you are highly dependent, are unable to be true partners as we have defined the term. Their financial goals, sales structures, performance incentives, and ingrained culture prevent them from embracing this new type of deal, but you can’t eliminate them from your business technology environment. Instead, you have to control them with leverage rather than trust: with discretionary projects as incentives and alternative providers as threats. You may even need to create a long-term plan to reduce your dependence on such suppliers, who cannot or will not be partners.

Duncan Jones is a Vice President and Principal Analyst at Forrester Research, serving Sourcing & Vendor Management Professionals. He will be speaking at Forrester’s upcoming Sourcing and Vendor Management Forum, May 24-25, in Las Vegas, NV.