Are you satisfied with your business partners, service providers, and suppliers? Be honest, now: Yes or no?
Answering this question truthfully is important because companies that churn through relationships do so at great expense in terms of time, resources and money.
This is especially true for buyer-supplier relationships where procurement organizations preach competition and try to avoid “lock-in” associated with long term contracts.
Building strong business relationships requires a balancing act. But what is the trick to get—and stay—balanced?
This was the question University of Tennessee researchers set out to answer in a research project funded by the United States Air Force. Researchers studied some of the world’s most successful business relationships to learn the “secret sauce” for getting the most out of business relationships.
The answer? It starts with an intent to create and maintain a win-win relationship. In addition, the research showed the most successful organizations followed five simple rules for creating business relationships. These rules were codified into methodology that was coined Vested.
The Rules for Success
Rule 1: Outcome-Based vs. Transaction-Based Business Model
Most business relationships are built on a transaction-based model that’s often coupled with a “cost-plus” or a competitively bid fixed price-per-transaction pricing model to ensure that the buyer is getting the lowest cost per transaction. Transaction-based models produce an Activity Trap because they encourage work—not results.
Successful organizations flip transaction-based economic models on their head; instead of buying transactions they buy outcomes, which can include targets for availability, reliability, revenue generation, employee or customer satisfaction and the like. Interests are aligned around prime objectives—not simply showing up to perform tasks.
Rule 2: Focus on the WHAT not the HOW
Think of it this way. Your service provider or supplier likely won the contract because they have the expertise that your organization lacks and needs. If you’ve selected the right partner, you shouldn’t put them in a box. Instead, define what you want and challenge your business partner to help you get there.
By collaborating with your business partner, you will drive innovation.
Yes, there is still a need for material to be stored, calls to be answered, lines of code to be written, clinical trials to be managed, and goods to be transported. That doesn’t change. What does change is the way organizations work. The goal is to give your business partner permission to innovate; simply because something has always been done a certain way doesn’t mean it must always be done that way.
Rule 3: Clearly Define and Measure the Desired Outcomes
This seems obvious, but all too often it is not done. Many organizations fall into measurement minutiae: trying to measure everything that moves. Once business partners are aligned on the critical success factors they will have a much better chance of meeting them.
Be on the lookout for misaligned metrics. For example, if your procurement organization is measured on getting a price reduction but your supplier’s business development person gets a commission tied to revenue, they are likely to clash. The very best relationships purposely align the measures (and bonuses) of the business partners.
Rule 4: Pricing Model with Incentives that Optimize the Business
A properly structured pricing model includes incentives that enable business partners to achieve their targets. Strategic businesses partners should apply three principles when creating a win-win pricing model:
- The pricing model should balance risk and reward for eachorganization. Ideally, organizations share the risk and the reward. Think of it as being in the same boat; you win together, and you lose together.
- Risk is not something to simply shift, it should be allocated to the party that can best mitigate the risk. And if a party assumes a risk, it should be compensated with a risk premium.
- Lay the foundation for the parties to create value, not just to exchange value. When Microsoft outsourced their finance operations to Accenture, it established an incentive model that highly motivated Accenture to collaborate in the transformation of Microsoft’s finance operations.
Rule 5: Insight vs. Oversight Governance
Getting a good deal is one thing—but a “deal” is static. Without proper governance you will find yourself back at the negotiating table when “business happens.” The most successful business relationships have created a flexible and credible governance framework that keeps the relationship fair and balanced over time—not just at the deal signing. Procurement and outsourcing teams are beginning to apply SRM (Supplier Relationship Management) processes. But simply managing the supplier better shorts everyone involved; the best organizations work collaboratively to manage business with their business partner.
The Vested five rules may sound simple enough, but it takes diligence and the right mindset to follow them successfully. Companies like P&G, Jaguar and Dell are using these rules to redefine what “winning” looks like in their business relationships—and you can too. Harness them as you reinvent your buyer-supplier relationships and you will create a highly collaborative environment that delivers innovation, rather than just talking about it.
This article was written by Kate Vitasek from Forbes and was legally licensed through the NewsCred publisher network.