Is your contract killing collaboration?

The top decided to reduce from 35 suppliers down to 7 mega collaborative partners in order to share their vast experience and create superior value and returns. The strategic intent was for them to be trusted partners as opposed to the legacy position where suppliers were instructed how to deliver. Apart from the confusion at the operational levels on how to transform the joint business, the commercial staff mis-translated the basic requirement.

In every business arrangement Commercial plays a pivotal role. In this case the customer’s department retrained itself using standard courses from a prominent industry body and rebranded themselves as Vendor Managers.

“Vendor management is the process of overseeing and maximizing value from an organization's external suppliers (vendors) through strategic selection, contract negotiation, performance monitoring, and risk mitigation, ensuring they consistently meet business needs, control costs, and support overall goals.” (Google).

Two of the resultant relationships, one valued at $600m and the other at $350m per year, were not performing as expected. The Suppliers believed that nothing had changed. They were still using the same contract and SLAs with the need to achieve fixed percentage year on year cost reductions. They could not see how the Vendor Management policy encouraged innovation and continuous improvement. They did not feel they were treated as an equal partner and old fashioned 'supplier' bashing was still the norm. Overall, they believed that both sides were losing out.

The Operations staff on both sides were confused by the new role and activities of Vendor Managers/Sourcing Managers who appeared to be getting involved in every aspect of the engagement. Their view of collaborative working was a hands-off managed service relationship rather than one based on detailed contracts. Instead, the parties’ objectives and ways of achieving them were not aligned. Furthermore, the suppliers were not incentivised to put forward new ideas.

As a result, the customers commercial staff reaction to this chaotic situation was to revert to instructing the suppliers on what to do and when. The loss of trust in the relationship created negative feedback and bad feelings that would take a long time to repair.

Two years into these “strategic partnerships” the Boards were questioning their original decision because the expected returns were missing. The decision to pursue a Vendor Management (one-sided procurement) policy was the fundamental cause of these relationship failures. Commercial staff, whether focused on sales or procurement, must realise that the wrong kind of contract will remove any chance of successful collaboration.