What is “the customer / vendor experience"?
Organizations worldwide are increasingly concerned about their image. Today's economic conditions and business structures enable increased choice over who we want to do business with, and increased visibility into a company's values and performance. So in executive minds, the customer / vendor experience has become a critical source of value and differentiation.
But what does this mean? Is it just about trust, integrity, fairness? Certainly these are fundamental attributes. But for many, the customer / vendor experience is also becoming encapsulated in the overall term 'ease of doing business'.
In this edition of Contracting Excellence, we explore how contracting and relationship practices and capabilities impact 'ease of doing business' and provide a source of competitive advantage.
Tim Cummins, IACCM
by Tim Cummins IACCM
In today’s internet age, as business professionals and as consumers, we increasingly demand that our interfaces and suppliers operate with speed, flexibility and a readiness to adjust to our preferred way of doing things. We expect convenience and efficiency, high quality and responsiveness to our needs or issues. We select those we deal with based on a sense of empathy and “fit”, and we maintain relationships that seem fair, balanced and ready to adjust to our changing needs or expectations.
These values apply to all relationships, both internal to the business and external. They can be satisfied only through new approaches to service delivery and design, at both an organizational and functional level. To be realized, they demand fundamental shifts in the way contracts and trading relationships are agreed, structured and managed. Hence, the impact upon our community is substantial and our leadership in design and execution is critical to our reputation, status and value to the business.
In this issue of Contracting Excellence, we explore aspects of today’s networked world related to “ease of doing business” and the impact it has on key areas of contract policy and practice. It builds on previous issues, most notably to the Volume 1 issues dealing with Collaborative methods (Vol 1.2) and Organization management (Vol 1.6).
Changing executive demands
A fundamental shift has become increasingly evident in recent months. This has been the realization by a growing number of executives that their business success depends on the quality and integrity of trading relationships. More than ever before, the ability to build and sustain brand image and value hinges on the successful coordination and management of a supply and distribution network. This demands selection criteria that extend beyond cost considerations, and relationship management techniques that ensure the delivery of value and innovation.
Few companies can boast the infrastructure that motivates and oversees such qualities. Few suppliers have truly thought through the implications to their commitment capabilities. Therefore, many sourcing and contracting groups are struggling with the question, “How do we make ourselves a supplier/customer of choice”?
Consistent business terms
Among the challenges generated by this environment is the need for greater global consistency, the importance of making “global promises”. This is a topic highlighted by a growing number of CEOs as they wrestle with the issue of trust. The ability to make globally consistent promises often runs counter to the current rule of law and the need for sensitivity to local customs and practices. To what extent are such universal codes or methods emerging, and are balanced developments that draw on good practice wherever it may be found, or are they being achieved through the imposition of existing terms and methods by those in positions of economic power?
Another area of change is the need for increased sophistication in the way that business relationships are segmented and managed. A “one size fits all” standardized approach may appear simple, efficient and low risk — but it runs counter to many aspects of the “ease of doing business” concept. Therefore, the value and strategic importance of individual relationships must be understood and then supported through appropriate forms of contract, negotiation and relationship management.
Measurement and reporting
In order to drive sustained improvement and maintain competitiveness, the newly emerging world places growing emphasis on measurements and reporting. The need for creative and transparent governance systems becomes daily more evident. IACCM has recently initiated in-depth research in this area, but already the change is visible with the growth of post-award contract, relationship management groups and the increased adoption of supplier award and recognition programs.
Today, no story is complete without considering the role and contribution of automation. Just as technology is the driver of change, it is also in many respects the solution. Clearly, there are applications such as CRM (customer relationship management) and SRM (supplier relationship management) that play key roles. But what other tools and systems are out there, playing a bigger and more direct role for those in contract management, legal or sourcing?
The points I have touched on above are among the many considerations that are addressed in this issue of Contracting Excellence. It is clear that organizations can address the challenge of ease of doing business only through a holistic approach and a readiness to change. This change is most readily driven by openness to benchmarking, a hunger for understanding best practice, and a willingness to re-assess service delivery methods and organizational models.
Key to this is the need to assess process design, and IACCM is equipped to help with such initiatives.
The role of IACCM
The development in 2007 of the IACCM Capability Maturity Model, now supported by robust benchmarking and process analysis tools, has enabled a growing number of our members to obtain objective assessments of performance and detailed action plans for process and organizational re-design.
A source of competitive advantage
Through these changes, contracting and relationship management (Commitment Management) can indeed become a core competency and source of competitive differentiation in the networked world. Ease of doing business is emerging from a generalized concept to a well-defined business reality.
Tim Cummins, CEO, IACCM
The challenge of contract management in a supply-constrained environment
In today’s supply constrained environment, the power has swung to suppliers. A “customer of choice” relationship enables the customer to become the preferred sales channel for the supplier, which provides greater stability in periods of market volatility. This article explores different approaches and models organizations can consider to ensure continued value from their trading relationships.
PROFESSOR ROBERT HANDFIELD North Carolina State University
by PROFESSOR ROBERT HANDFIELD North Carolina State University
• In today’s supply constrained environment, the power has swung to suppliers who can often choose their customers based on the profitability and strength of the relationship.
• A “customer of choice” relationship enables the customer to become the preferred sales channel for the supplier, which provides greater stability in periods of market volatility.
• This article explores different approaches and models organizations can consider to ensure continued value from their trading relationships.
My discussions with supply chain executives are starting to have a familiar tone: everyone is feeling the impact of major shortages and increased risk in a variety of supplied inputs. These impacts are typically first encountered in the form of the announcement of a price increase by key suppliers, either when contracts are re-negotiated, or even in contract management stages years later. In the past, a supply management executive’s first reaction in the face of a price-increase would have been to vehemently object, followed by a series of angry meetings terminating with a voiding of the contract and a new request for project (RFP) issued for a new supply chain relationship.
In today’s supply constrained environment, however, this is often not an option. Further, suppliers are often at or near capacity, and now have the luxury of “picking” their customers based on the profitability and strength of the relationship. Supply constrained environments are particular to certain sectors, and are felt most when the party facing supply constraints sells into a market that does not feel supply constrained. In this situation, certain segments of a buyer’s market may be over-supplied and highly competitive, yet other sectors (such as copper, rubber, resins and engineering services) may be supply constrained due to unique circumstances associated with these particular market conditions. This situation can trigger both financial pain and also some irrational internal/external behavior on the part of both parties to the transaction.
This situation leads to our discussion of the concept of “customer of choice” (CoC). A CoC relationship is unique in that the customer seeks to become the preferred sales channel for the supplier, which transcends the normal booms and busts associated with market dynamics. Although this concept has been around for some time (first explored by Michael Leenders and David Blenkhorn in their book Reverse Marketing: The New Buyer-Supplier Relationship in 1988), most supply chain executives I speak with have yet to really embrace this approach to any degree (Honda and Toyota are the exception). The effect of the credit crunch in terms of procurement behaviour is still playing out. Faced with the current capital liquidity panic on global markets, the roller-coaster of commodity pricing, and the need to maintain margins in the face of these events, my experience (as well as those of Mark David who helped me with this article) leads me to believe that customer-supply management behavior is becoming even more aggressive. The concept of CoC requires one to look beyond the short term and realize that in the longer term, capacity will be re-adjusted (perhaps within months), pricing will stabilize, markets will re-adjust, and that the only element that will remain consistent will be competition. A few select firms have grasped this concept — in one instance, I gazed with wonder on a “thousand-year plan” by a firm that laid out the expectations of how the firm would grow organically based on current views of future global economic development.
Wise executives recognize that the concept of CoC is important now, and not when it’s too late and the “emotional memory” of aggressive tactics has polluted relationships. Recent research by the Supply Chain Resource Cooperative (http://scrc.ncsu.edu) points to the fact that CoC relationships are a function of multiple different dimensions of the customer-supplier relationship, and can often change suddenly based on different events and business environments.
While there are multiple global examples of supply constraints that illustrate the types of shortages that exist in industry, I will speak of several US-based constraints that I have witnessed in the last two to three years.
The craft labor situation
An immediate concern of many global oil and gas pipeline and exploration firms, construction firms and contractors is the shortage of welders and other forms of craft labor. Welder rates have also escalated in particular, markets in Houston and the Golden Triangle (Texas to Louisiana border) have escalated by 18% from June 2006 to June 2007 and total compensation has increased by 23%. Similar situations are occurring across the globe — in Azerbaijan, Asia, Nigeria, Angola, Venezuela, the oil sands in Canada and many other locations.
On the supply side of the craft labor situation, there is an increasing number of young people who prefer white collar work. In general, young adults in college are interested in white collar, high-tech and software industries.
The engineering shortage
Another emerging shortage is the lack of suppliers with qualified engineering talent in the US. There are increasingly fewer students enrolled in engineering colleges. The National Science Board (2004) observed, “a troubling decline in the number of US citizens who are training to become scientists and engineers, whereas the number of jobs requiring science and engineering … training continues to grow.” The board further observed:
… if the trends identified in Indicators 2004 continue undeterred, three things will happen. The number of jobs in the US economy that require science and engineering training will grow; the number of US citizens prepared for those jobs will, at best, be level; and the availability of people from other countries who have science and engineering training will decline, either because of limits to entry imposed by US national security restrictions or because of intense global competition for people with these skills.
Even if action is taken today to change these trends, the reversal is 10 to 20 years away.
Who bears the risk?
Other examples of increasing shortages in multiple industries include fabricated equipment, industrial machines, short-term IT labor, railcars and contracted transportation. While the current market has brought down commodity prices form the highs of July 2007, executives I speak to that are subject to these price fluctuations are on the edge of their seats. Will prices go up? How can we manage our strategic supplier relationships under such circumstances? Who should bear the risk? The swings of the US dollar, the Euro, and other currencies lend even further tension to what were once commonplace contractual relationships. How should the contract be structured to deal with situations such as these? Transportation rates are a direct function of increasing oil prices, which impact virtually all global trade and longer-term contractual relationships. Faced with a major potential shortage, should one accept inflated prices from suppliers, or are there other means to manage such a relationship? Is stability of rates and pricing a factor that is worth paying for?
What to do?
Given these situations, what approaches or models will organizations need to adopt to ensure continued value from trading relationships — and how will they measure such value? In our view, there are several options available that are worth considering.
Work with the current supplier, but move towards informed cost-plus contracting strategies
Many organizations are migrating their strategic sourcing efforts away from simple price leveraging, and are driving towards developing strong cost modeling and supply market intelligence networks. With today’s markets favoring the supply side, which is padded with many contingencies that are risk averse in a lump sum contracting model, it requires owners to take a different approach and look at cost-plus contracting strategies. Taking the time to sit down with preferred suppliers, lay out the issues and build a relationship is an important process that can lead to long-term cost savings for both parties. Having senior executives from both sides openly discussing their challenges, sharing their pains, and establishing a basis for the groundwork is important. Too often, senior executives leave this to buyers and sales agents, assuming that contracted price and volume terms are non-negotiable and the supplier will simply comply to the buyer’s requirements. Nothing could be further from the truth, as there is no substitute for a true show of commitment from both parties that the relationship is serious.
Cost-plus contracts are only practical when both parties agree to be transparent and open about how costs will be measured, tracked, and updated. Components of the contract should be structured to drive agreed-on costs through standard labor rate models and competitive negotiation, utilizing internal “should-cost” models around equipment to reach a total cost of ownership approach. Commodity pricing should be linked to rational external market indices, with the caveat that both parties will work together through value-analysis, product re-design, and substitution efforts to minimize the use of high-priced commodities. This approach also involves segmenting the supply base and using preferred suppliers for the majority of business in price-sensitive segments. When structured in a fair and informed manner, ultimately, any cost increases borne by the customer will be true cost increases.
This is a very different approach for many companies, and is hard to digest for traditional negotiators. It requires that supply management work more closely with the current supplier, armed with updated and valid market intelligence data to establish an open dialogue regarding the challenges the supplier faces in the market. There is a lot of inherent, intangible knowledge that exists which will be difficult to replicate if an open lump sum bid (LSB) is utilized, and the transition period required to shift the business to a new source is not without risk. There is no question that an open RFQ bidding process will drive the costs quote down — but there are additional transition costs that may be incurred. In addition, the safety, risk and compliance issues are a major concern when shifting business to a new supplier, and these are difficult to quantify in the total cost equation, but surely represent a risk worthy of consideration.
Work on supply-side economics with existing suppliers or in open sourcing processes?
If discussions with the current supplier prove to be unfruitful, it may be practical to develop the supply base. For instance, construction companies faced with craft labor shortages are now working with local trade schools, high schools, and community colleges in high supply risk geographies to extol the benefits of pursuing a trade in pipeline maintenance and engineering. This initiative recognizes that firms will need to lean extensively on a first tier labor pool which depends on craft labor. Again, market knowledge is key.
Firms must identify current “hot spots” for labor, reach out to local communities and push the benefits of that type of education, and be willing to back it up with training to provide an important supply-side resource at a relatively low cost. Investment in training and engagement with the workforce is also desirable. Many firms are now also offering to fund young people’s education in community college to obtain their welders’ certificate if they sign up to take a position upon graduation.
Structure less business on lump sum bid
In this environment, LSB contracts will generally increase costs. Suppliers will build more contingency into the contract, knowing that if they do not win the contract this time around, they will win the next one. Especially when major projects are 18-24 months in duration, suppliers are likely to bid on the high side, knowing they are bearing the risks of what labor could look like at that time.
Many organizations are moving to a time- and materials-based contract, requiring suppliers to produce to actual payments made. Best-in-class companies are relying on suppliers to produce actual labor, material, and overhead/margin rates as part of their time and materials contracts. It is not difficult to discover who is bluffing and who is not. An empirical observation noted in past studies is that supplier labor rates are generally in the same range, and that it is rare to find a supplier with a cost that is 10–15% above others. Customers signing such a contract should also be willing to bear the risk of material and labor rates increases, given that the option of not having any reliable source of supply is highly undesirable!
Track overhead and profit
Suppliers do vary in the amount that they charge for profit, burden and overhead. To discover discrepancies, the use of timely RFPs is encouraged as a means of discovering variances in this area. The timeframe for these initiatives should be openly shared with the incumbent supplier, with the knowledge that competition is not something that is ignored by the customer in a long-term relationship. For example, one individual noted that “In my RFP — everybody was within 20 cents of each other for skilled labor $17 an hour plus change.” Another oil and gas company we interviewed noted that a year ago they experienced significant challenges with tank construction and maintenance needs, and ultimately chose two key suppliers. With this approach, they then moved away from a LSB model towards a cost-plus model, with both suppliers openly sharing their costs and breaking down pricing. This has been working extremely well — has sped up progress on the project and has driven improved cost transparency on project costs, especially in a tight labor market that is unlikely to change for the next two to three years.
These approaches require a different type of contractual relationship — one where trust and collaboration is front and center. When both parties agree to jointly bear the risks and rewards of an increasingly volatile global economy, the impact of constrained supply markets, reverse auctions, commodity increases, labor shortages and, most importantly, capital shortages can be bypassed to the benefit of both parties. Perhaps it’s time you take a look at that hundred-year view (let alone the thousand-year one!)
Professor Robert Handfield, PhD,
North Carolina State University,
About the author
Robert Handfield is the Bank of America University Distinguished Professor of Supply Chain Management at North Carolina State University, and Director of the Supply Chain Resource Cooperative (http://scrc.ncsu.edu). He also serves as a Visiting Professor with the Supply Chain Management Research Group at the Manchester Business School.
The SCRC is the first major industry-university partnership to integrate student projects into the MBA classroom in an integrative fashion, and has had over 20 major Fortune 500 companies participating as industry partners since 1999. Prior to this role, Robert was an Associate Professor and Research Associate with the Global Procurement and Supply Chain Benchmarking Initiative at Michigan State University from 1992-1999.
Robert has consulted with over 25 Fortune 500 companies, is the Consulting Editor of the Journal of Operations Management, and the author of several books on supply chain management, the most recent being Supply Market Intelligence, Supply Chain Re-Design and Introduction to Supply Chain Management (Prentice Hall, 1999, and translated into Chinese, Japanese, and Korean).
Improving the partner experience through policy, process and automation
For companies that don’t have the expertise to meet the challenges of reaching out to new customers in new and innovative ways on their own, there is a potential partner out there to help. But first, you must set up a relationship, process, and business model that will be beneficial to all parties. This article shows what is needed to motivate and utilize the services of partners for the maximum effect.
CRAIG GUARENTE Oracle
by CRAIG GUARENTE Oracle
• For companies that don’t have the expertise to meet the challenges of reaching out to new customers in new and innovative ways on their own, there is a potential partner out there to help. But first, you must set up a relationship, process, and business model that will be beneficial to all parties.
• Whatever your company’s model, you should have a limited number of touch points and let the business flourish.
• Once you have analyzed your partnering model, outlined the most efficient processes, and targeted extraneous activities for elimination, you can automate your contracting work flow, ordering process, and payment processes with your partners.
• You will need a robust contract management solution where reports and alerts can be automatically generated at any time, rather than waiting for a problem to surface.
The days of the go-it-alone business model are long gone. Today’s business relationships are more complex and more dynamic than ever before. In the quest for higher profits and bigger margins, companies are expanding the fields in which they play in a variety of ways. Whether it is through acquisitions, new products, or venturing into new geographies, today’s businesses are faced with the challenges of reaching out to new customers in new and innovative ways.
Most companies don’t have the expertise to meet these challenges on their own and they are reaching out more and more to other companies for help. Be it expert knowledge of a specific industry, experience with a specific customer, or a streamlined distribution channel, there is a potential partner out there to help. This help, however, is not purely altruistic. There is a profit motive on all sides of these relationships. To motivate and utilize the services of partners for the maximum effect, we must set up a relationship, process and business model that will be beneficial to all parties.
Contracting organizations can help establish such a model. However, it is important that we, as contracts professionals, look at the bigger picture and the ultimate goals of the partnership — not just our specific function. Three areas where the contracting organization can improve the partner experience include:
· standard and streamlined processes;
· simple yet robust automation; and
· access to information.
The more successful your partners are, the more successful you will be. Simple, streamlined and efficient processes are important to ensuring this success. It almost goes without saying, but I’ll say it anyway — it’s critical to create a process and business model that is advantageous to your partner community.
Coming from a technology company like Oracle, it is easy for me to jump to automation as the first step in improving the partner experience. However, while automation is a key driver in this journey, we shouldn’t start there. First, we must look at our current partner process. How do you reach out to partners, contract with them and support them? What is the ordering process? How do you report back to each other on successes or challenges? The list goes on.
Every company will engage partners in a different way. Some have a few strategic partners limited to a specific solution, market or geography. Some have large numbers of partners all around the globe. Whatever your company’s model, one of the most effective things you can do in your contracts is to get out of the way. This means that we, as contracts professionals, need to establish a process where we are almost never needed. We should have a limited number of touch points and let the business flourish. This may sound strange given the fact that the complexities are often multiplied as our contracts include more and more parties. It goes against our very nature as contracting professionals where we want to dot every “i” and cross every “t’. I would argue that when done correctly, we can maintain oversight and limit our contracting workload at the same time. Here are a couple of examples:
· Typical reseller or distribution relationships are time-bound. They are valid for a certain period of time and then they must be renewed. If you have such a business model, perhaps you should set up your contracts to renew automatically unless there is notice by one of the parties. Don’t require a new contractual document to be negotiated every year or two. But this solution does require you to have a good contract management solution in place.
· If you have partners that have a high volume of transactions with you, make the ordering process as streamlined as possible. If you have to negotiate a complex partnering arrangement, do it at the beginning of the cycle. Let the ordering process work as an ordering process and not as an opportunity to renegotiate terms and conditions.
· Allow for alternative contracting methods to meet the needs of your partners. Some examples of this include online acceptance of licensing agreements, electronic signatures, and posting some terms on websites instead of directly in the contractual documents. All of these process improvements will eliminate the need for a contracts person to step into the work flow and draft/amend/sign documents.
Once you have analyzed your partnering model, outlined the most efficient processes, and targeted extraneous activities for elimination, you can automate your contracting work flow, ordering process, and payment processes with your
The way we work with partners varies according to our business needs. As stated above, some partners fill a strategic role within a specific market place, customer or geography. These partners may engage in a small number of transactions but with high dollar values. Other partners fill a completely different need — they may have vast distribution channels across large geographies, or they may engage in a heavy volume of lower dollar transactions. There are also many partners that operate in between these two models. We must use automation in the contracting and ordering process that meets the different needs of all our partners.
Using technology to meet the needs of high-volume partner business will have an immediate impact on your working relationship. These partners are looking for minimal touch points, speed in ordering and accuracy in payments. One solution for this situation is to connect the back-office systems of you and your partners. These partners don’t have the time to submit contracts for every order. They have already entered all of the data into their systems, so why not push it directly into your systems? Such a solution not only takes a commitment on the technology side, but is based on the assumption that all the terms and conditions of each transaction have been agreed to. There is no real contracting here, only ordering.
A solution for partners with a moderate amount of volume is an online order portal or store. Such a solution will require the partners to enter the details of each transaction, but there are ways to make it easier for the partner. Customized store fronts, pre-populated fields, and the ability to upload data from partner systems or documents are a few improvements that could be made. This technology can provide a simple, consistent way for partners to contract with you on a transactional basis.
Finally, remember when technology might not be appropriate. You may have a market segment, region or a small partner who will not use any of the tools you provide to them. They want contractual documents signed by both parties for each transaction. In this case, the decision is yours. Is the business strategic to the point where we allow this manual process (and added cost), or is the price too steep and the margin too small to permit such an interaction?
Access to information
Access to information and visibility into the business is the final area where the contracts organization can play a critical role in improving the partner experience. The need for information has radically changed over the last 25 years. I can recall my own experience ordering a record album when I was much younger over the phone. I mailed my check and waited patiently the 6–10 weeks for the item to arrive. When the item eventually arrived, I was satisfied with the experience. Compare that with my latest online purchase of a new mobile phone ordered online using an online payment broker (so I didn’t have to re-enter payment details). I then spent the following three days checking the vendor’s website to see when the item shipped, and then the shipper’s website to see where the item was in transit. I also signed up for an automated alert so I would know when my item would be at my front door. In both scenarios I was a “happy customer”. However, you can see how the rules of information management have changed. Can anyone imagine ordering an item online and waiting two to three months for delivery without any knowledge of the item’s whereabouts?
Partners have the same need for information when they are contracting to distribute goods and services. The contracts organization is often the only group that possesses certain information that partners need. For example:
· Is the partner meeting its contractual obligations?
· Is performance in accordance with the agreed to support levels?
· Are there outstanding issues that require resolution?
· Has the partner contract been accepted and processed?
· When will the partner be paid?
It is up to us to add visibility into our processes and the contractual performance of our partners. Partners need instant, on-demand, up-to-date access to their status and performance as well as order and payment history. Once again, automation can be the key to providing partners with this level of visibility.
A key element here is to have a robust contract management solution where reports and alerts can be automatically generated at any time, rather than a manual system of compiling information only when a problem has surfaced. We need to help partners identify issues before they materialize. In the case of software licensing, nothing could be worse than having a partner resell software where they have no contractual right to do so. Why wait to reject an incoming piece of business when you can use your systems to reach out to your partners with information that would help them be more efficient and, therefore, more profitable.
The contractual arrangements between vendors and partners, as well as the supporting processes, can have a make or break impact on the working relationship between the parties.
The contract process can be the centerpiece in creating a framework for success. A standard contracting process with minimal manual touch points supported by robust automation that enables real time reporting will help your partners work more effectively with you. However, there is no approach that will meet the needs of all vendors and partners — it is the constant struggle between standardization and flexibility. In the end, it’s important that we have these debates and discussions with our partners to ensure we have a mutually agreeable working solution.
VP, Global Contract Services, Oracle USA, Inc,
About the author
Craig is responsible for managing the contracting process and personnel servicing of all lines of business. This includes license, consulting, hosting/outsourcing, subcontracting, and education sales contracting. In addition, Craig is responsible for establishing Oracle’s global contracting processes. This includes working with executive management, sales, IT, and product development on global contracting automation and system solutions, ensuring compliance with Sarbanes-Oxley legislation, and assisting the divisional contracting leads in meeting their specific regional requirements. He also works closely with the mergers and acquisitions teams to ensure proper integration of staff and processes from acquired companies.
Get the most out of your relationships during tough trading conditions
Difficult market conditions require tough decisions, yet it should not be a one-size fits all policy, regardless of whether you are looking upstream or downstream.
Segmenting your relationships is a common sense activity, as is developing your people and equipping them with the right tools, policies, processes and systems to address your relationships based on their value and importance, and to assign your assets where you will get the best returns.
MARK DARBY, ALLIANTIST
by MARK DARBY, ALLIANTIST
• View tough trading conditions as an opportunity to get the best from your portfolio of relationships, not as a threat to them — a poor reputation may be for life, not just a downturn.
• Allocate your assets carefully and implement initiatives based on the category value and importance as well as relationship significance to your success — remember that one size does not fit all.
• Equip your people with the right tools, mindset and systems to get the job done well, whether it is with a strategic alliance or a commodity provider.
• Use the latest partner and relationship management tools for high value and important relationships, and traditional transactional automation tools for commodity activities.
It’s been a tough period for some industries; well-known banks and travel firms have gone bust, and there are fire sales elsewhere. Much of the aftershock is yet to be felt by the relevant upstream suppliers and downstream partners, let alone their customers. However, we are already hearing organizations turning to old tactics and blanket policies for troubled times.
· beating up suppliers to achieve immediate cost reduction;
· introducing embargoes on discretionary spending;
· eating downstream partner rewards by taking their “piece of the pie”; and
· expecting partners to discount more heavily in joint offers.
An example came to my attention in September which serves to reinforce the opportunity costs of poor segmentation and one size fits all policies. A large blue chip organization has been conducting an e-auction for consulting services to obtain an immediate cost reduction against “fees” charged. A number of key consulting suppliers are being aggressively driven down on price to compete with each other for an unclear prize (no guarantee of future business). Some of those suppliers have critical insights that will affect the survival and future growth of that organization, yet they are simply being measured on price. Even if all of the suppliers decided to participate in the auction (which they haven’t), what incentive will there be afterwards to offer their brightest people and most innovative ideas into a customer that treats them like a pack of paper clips?
Panic measures can quickly set in at the top given the fickle nature of the stock markets and the analysts that affect them. It’s easy to mandate short term “slash and burn” or “spray and pray” targets across the relationship portfolio — whether on the buy or sell side. The use of transactional tools like e-auctions can speed up short-term results as well. But decisions made in haste are soon regretted when the good times return. Talking with a procurement director about the last downturn, he was lamenting his aggressive cost reduction tactics with all suppliers to achieve short-term targets. When business conditions improved, a range of key suppliers got their own back and showed little or no interest (or trust) in that organization’s programs for joint innovation, investment and collaboration. Its reputation has since suffered and so have its results. Another organization culled its sales partnering program investments and changed the sales reward metrics to secure short-term wins at the cost of partners; of course the partners quickly saw the writing on the wall and deserted it. It was no surprise then when the market recovered, that its former partners shunned it to work with other companies for mutual benefit.
Smarter organizations understand the need to segment their relationship portfolios, especially in times of major opportunity and threat. Indeed, segmentation and relationship management was considered an essential practice for future success at the IACCM 2008 EMEA conference.1 If you haven’t already done so, now is the time to take a close look at the portfolio and how you manage it before missing big opportunities or making costly mistakes. Of course, buy and sell side call their relationships different things, but the underlying messages are the same — one size does not fit all and you need to equip your people with the right tools and mindset to do their job well.
In industries such as oil and gas, some suppliers now have the upper hand, so it’s no wonder that many buy-side customers are looking for new initiatives. Supplier relationship management (SRM) may be the answer — much like customer relationship management (CRM) was going to be the holy grail for sell-side firms. Both can be, but only under the right circumstances.
ALLIANTIST defines SRM as “the activities undertaken by an organization with its suppliers for mutual and sustainable benefit over the life of the relationship”. The emphasis here is on “with” not “to”, and “mutual” not just “buyer” benefit. It is about collaboration rather than more traditional buyer/supplier practices. And one can easily substitute the word “suppliers” for “customers” to reflect a different relationship management audience. The principles are the same, although some aspects differ, such as metrics and the resources involved.
As outlined above, SRM is not a one size fits all initiative. It should mean different things depending on the value and importance of the category to the buying organization and the supplier relationship itself. Firms can then invest their valuable assets and resources for optimal returns. There should be some consistency in application as shown in Table 1 above where this organization has segmented its suppliers into four categories:
Organizations that have already carried out segmentation are generally seeing positive results with Tier 3 suppliers through typical procurement category management activity and the use of e-sourcing tools. In many cases, there is still not enough emphasis on value-add outside basic cost saving and limited benefits tracking. There are few supplier reviews and a lack of proactive supplier management. Tier four suppliers should have limited relationship management, with the focus on automation, efficiency and light touch, with perhaps just one eye on the future opportunities and threats from this part of the portfolio. It is in these Tier 3 and 4 areas that some of the old tactics may still be effectively employed for short term gain, especially where there is a host of alternative options. Transactional technology solutions and tools are well-established in this category, although none could truly be deemed relationship management oriented. ALLIANTIST has recently introduced PAM, the partner and alliance relationship management software platform where pioneer customers are already starting to see positive returns from using it either instead of or alongside transactional tools like e-auctions and contract management software for their Tier 1, 2 and 3 relationships.
Tier 1 and 2 relationships do need to be treated differently, and this is where adopting true relationship management practices can deliver the greatest returns. To date, few organizations have worked out how to get the best out of these relationships, and still focus too much on the contract. It’s not about the contract — it’s about the relationship, of which the contract is just one component!
Before we look at possible solutions, let’s understand an example of categorisation on the sales partnering side. Segmentation has recently been carried out by BT Global Services (BTGS) for its global sales partners, the system integrator and other services organizations it works with to meet end-customer needs. ALLIANTIST assisted BTGS to move away from a one size fits all approach and reorganise it sales partnering business. The results have been positive in terms of increased revenues and margins, and a growing reputation for BTGS of being the partner of choice in its field. In the past, valuable assets were expended on organizations that only wanted to treat BTGS as commodity network provider, whereas those assets could have been used with collaborative partners for much better outcomes. BTGS now has a segmented model which addresses three types of sales partner, each having specific resources and tools (the partnering excellence toolkit) to achieve mutually beneficial outcomes. The partner types include:
• Supply global partner — a partner BTGS sells to and may sell through, but has less interest in making investment or working together on developing joint “go to market” offers.
• Emerging/development global partner — organizations that are keen to collaborate and invest in short-term opportunities of relatively low risk for an existing market/sector, or partners that show potential but need to improve in one or more areas.
• G2M global partner — organizations that are keen to work with BTGS on transformational sell with (go-to-market) initiatives that require deep collaboration and investment with increased risk, but offering greater short- and long-term rewards.
Partners are mapped based on their desire to collaborate and invest with BTGS, as well as their business development potential to help BTGS achieve its goals while also achieving their own. Diagram 1 depicts a profiling tool we designed where the two organizations address a range of questions that don’t always get considered. They then share how they feel about the current situation versus the desired situation, and then move to a more strategic debate (using other tools) about future opportunities.
Having carried out an appropriate segmentation, how do you address the Tier 1 and 2 type relationships for improved outcomes and get better ongoing results from the Tier 3 associations? We propose that an effective relationship architecture (ERA) facilitates the relationship objectives and mitigates against surprise or failure. Components of an ERA include:
• Relationship business plan outlining each organization’s individual and joint objectives, and initiatives including relationship building and business improvement activities.
• Relationship scorecardKPIs and assessment processes, measuring both the relationship health and business results for each party in an open and transparent fashion.
• Governance activities, such as governing bodies and working policies, as well as legal contracts and associated safeguards, giving rise to clear consulting, decision and dispute resolution activities.
• Resources and organization, such as organization touch-points, roles and responsibilities and agreed business processes for working together well (for example, reward frameworks, shared ground rules, investment policies).
• Shared tools and frameworks, for example, to manage stakeholders, risks, projects, negotiations and joint reviews.
An ERA should be designed taking into account the importance of the goals and objectives, each party’s ability to execute, and the maturity of the relationship between the parties. In addition, the power and profile of both parties will help determine the ERA. As with relationship management itself, one size does not fit all cases. Using the ERA Map2 can help to accelerate ERA development and reduce costs and risks in the process.
While all of this is to some degree common sense, it is not common execution. Part of the problem has been due to the organizational strategy, structure, resources, processes, metrics and reward strategies being incorrectly focused. Another part of the problem is that poor technology solutions have prevented individuals and teams from doing their jobs well. You wouldn’t use a hammer to paint a picture, yet that is what buy-side organizations have been doing with (say) e-sourcing and contract management tools in the Tier 1 and 2 domain. It’s the same with sell-side firms who rely on CRM and partner relationship management (PRM) systems when they are fundamentally contact and lead management solutions, not really relationship building and ongoing management systems. In the past, relationship management systems haven’t addressed the needs of strategic and higher value collaborations. Indeed, Gartner3 has reported that the top tools in use by partner and alliance professionals still include email, spreadsheets and paper! But things are changing.
For example, BT uses Siebel for its basic CRM sales needs but then complements that with PAM, which helps it search for, select and negotiate with partners for mutual benefit. The National Probation Service in the UK, and London, West Midlands and Dorset Probation areas are sharing PAM with key partners to achieve mutual benefits across the relationship lifecycle in joint projects and with a shared management system that delivers five key benefits.
· Internal users enjoy access to dynamic investigation, creation and execution tools such as those outlined in ERA that lead to new skills, higher credibility and increased confidence.
· External partners achieve a
higher standard of delivery, and improved collaboration while sharing the tools.
· Senior management gets transparency of operation, accuracy and speed of information, confidence from credible reports, and are able to focus on “what” not “how”, and empower front-line staff while focusing experts on higher value initiatives.
· Efficiencies result from faster and better informed decisions, reduced paperwork and less re-work, where team-based collective intelligence is captured effortlessly.
· Outcomes areenhanced reputation, improved results from partners and alliances, internal projects and internal and external collaboration, leading to increased revenues and margins, lower total costs, reduced risks and happier key stakeholders.
In summary, it’s clear that some tough decisions need to be made in these market conditions, yet it should not be a one size
fits all policy, regardless of whether you are looking upstream or downstream.
Segmenting your relationships is a common sense activity, yet is still not common execution in many organizations. In those that are doing it, there are some other initiatives and easy-to-use specialist relationship tools that might help you achieve even better outcomes; and they don’t involve a hammer!
If you haven’t already done it, now is the time to develop your people and equip them with the right tools, policies, processes and systems to address your relationships based on their value and importance, and to assign your assets where you will get the best returns.
1. Tim Cummins’ keynote speech, IACCM EMEA conference, September 2008.
2. See Darby, M Alliance Brand: Fulfilling the Promise of Partnering Wiley 2006, from p 293 onwards.
3. Gartner, Survey Shows Scant Use of Collaboration Tools for Alliance Management by ASAP Members Publication Date: 6 March 2008 ID Number: G00155205 Carol Rozwell.
About the author
Mark Darby leads ALLIANTIST. We help people get their job done better and achieve breakthrough growth for organizations with innovative partnering and alliance services. Solutions include PAM, the software platform for partnering success, as well as coaching, advisory and training. Mark Darby is the author of Alliance Brand: Fulfilling the Promise of Partnering.
Enterprise applications 2.0: back to basics
The first wave of business software focused on modelling complex business processes within the four walls of the enterprise. The next wave will simplify business processes, embed intelligence, and enable inter-enterprise or network-based collaboration.
TIM MINAHAN Ariba
by TIM MINAHAN Ariba
The first wave of business software focused on modeling complex business processes within the four walls of the enterprise. The next wave will simplify business processes, embed intelligence, and enable inter-enterprise or network-based collaboration.
Somewhere along the way, enterprise applications got a bad rap. And, for the most part, they deserve it. Once seen as nirvana for information visibility and process efficiency, business software has since degraded to onerous capital budget projects that hog scarce resources, are complex to use, and even more challenging to implement.
What went wrong?
Well, for one thing, traditional enterprise application vendors have not kept up with the times. When the Web emerged as a viable business platform in the late 1990s, most application providers avoided the hard work of redesigning the complexity and limitations of their legacy technology. Instead, they merely slapped a fancy Web-based user interface on top of their legacy client-server architecture. And, like the Wizard of Oz, they hoped that customers would pay no attention to the applications behind the curtain.
Unfortunately, it was the customers that were forced to do the hard work. While pretty, these applications were still challenging to implement and use, requiring costly customizations and considerable process reengineering and user training.
Another mistake enterprise application providers made was in believing that technology alone could solve the world’s business problems. It can’t. Many companies quickly learned that technology exposed problems Technology is useless without effective processes and expertise.
The final error enterprise software vendors have made is focusing on automating existing information flows and business processes within the four walls of the enterprise. First, a software deployment is the exact time to rethink your business processes with the aim of eliminating complexity. And, while having control of your internal processes is a good thing, the truth is business happens between companies — not within them.
Enterprise software 2.0: keep it simple
In the past few years a quiet revolution has been taking place in the enterprise software space. Influenced by Web 2.0 innovations like MySpace, LinkedIn and Google — and driven by a new generation of Web-savvy workers entering the workforce -- software vendors have been forced to rethink how they design and deliver business software.
Today’s professionals are demanding that their enterprise software be quick to deploy, easy-to-use and globally accessible. They also expect software to enable new business processes, cross-enterprise collaboration, and information discovery that was previously impossible or impractical with offline or legacy enterprise applications.
In short, if the first wave of enterprise software was focused on modeling complex business processes within the four walls of the organization, the next wave of enterprise software will enable simplified business processes and accessible intelligence across an extended network of business partners.
• Simple: Enterprise software 2.0 will invoke lean techniques, Web-based delivery, and consumer-like interfaces to simply business processes, empower self-service enablement, and intuitive or system-guided navigation. For users, it means less to no software or hardware to install, simplified configuration, and walk-up user interfaces more akin to Amazon.com than legacy enterprise software.
• Intelligent: Enterprise software 2.0 will incorporate business information — from risk scores to community ratings to market trends — and advanced analytics and decision support within the context of the business process. For the first time, users will be able to analyze and execute fully informed decisions that cross-correlate internal data — such as purchase demand — with external business information — like pricing or availability trends and supplier ratings — all at the point of decision or transaction. Systems will also deliver advanced decision support tools to enable even the casual user to quickly analyze this wealth of information and test a variety of scenarios before making a final decision.
• Networked: Enterprise software 2.0 will leverage Web-based networks and communities to facilitate rapid discovery, connectivity, and collaboration between global businesses and their trading partners. With pre-built connections between their business applications and a Web-based community, business managers will have access to a global network of trading partners, community intelligence and ratings, and a host of network-based business processes. This will allow business managers to quickly identify and assess new customers or suppliers and just as quickly execute a wide variety of activities — from initial negotiations to purchase transactions and payment to performance improvements — with partners across the street or around the globe.
Evidence of the Enterprise Application 2.0 revolution is all around us — from embedded business intelligence and analytics to enterprise-class “software as a service” (SaaS) solutions to Web-based business networks for partner, personnel, and information discovery and collaboration. These advances should enable enterprise applications to live up to their original potential, making business easier, more efficient and cost effective, and more intelligent.
Chief Marketing Officer,
About the author
Tim joined Ariba, the leading provider of spend management solutions and services, after years in the technology research and consulting industries. He is a widely recognized expert and trusted advisor on supply chain, contract management and technology issues.
Contracting: ease of doing business
This article looks at how companies see ease of doing business as a competitive advantage and presents some excerpts from interviews with corporations, including HP and Rolls-Royce.
SANDRA LEWY and PATTABHIRAMAN PARAVASTHU, IACCM
by SANDRA LEWY and PATTABHIRAMAN PARAVASTHU, IACCM
• Failing to address ease and flexibility needs in relationships with partners and suppliers can result in missed opportunities and damaged relationships.
• Awards programs for suppliers provide good opportunities to build deep relationships.
• Using technology to promote collaboration, such as Rolls Royce’s ‘Suppliermanager’ website, can assist suppliers with their strategies and leads to improvements across the supply chain.
• Valuing communication across all levels of the organization and providing employees with the skills to help them build deep relationships with customers goes a long way to ensuring the “ease of doing business” factor for your organization.
• The contract manager’s role is an increasingly significant factor in shaping the relationship between companies.
In spite of the current economic conditions, most organizations are still managing to provide reasonable quality products and services at competitive prices. This has led to a situation where survival strategies now have to focus on other abstract factors which render unto the organization the customers’ and suppliers’ favor alike. One such factor rapidly gaining recognition among global supply chain companies is in “ease of doing business”. In this article we look at how companies see ease of doing business as a competitive advantage and present some excerpts from interviews with corporations, including HP and Rolls-Royce.
Complex relationships in global supply chains
Tim Cummins (President and CEO of IACCM), considers many of the complexities associated with global supply networks to be a consequence of poor communication and collaboration. “The complexity of these issues has grown exponentially as enterprises are faced with an increasingly complex array of negotiations, cross-border regulations and regional disparities in policy.” Organizations have therefore come to realize that communication and collaboration play a pivotal role in the success of global supply chain management.
For many companies involved in global supply chains, on both the buy and sell side, customers are increasingly expecting business to be quick, flexible and now, easy. Failing to address this can result in a damaged reputation, missed business opportunities and even the destruction of existing relationships and customer loyalty.
Arguably, ease of doing business has to become a natural state and a core element of selection and pricing strategy. A “good fit” must also reduce risks for both parties and therefore should be more actively sought. According to Dave Henshall of Purchasing Practice Inc, a common misconception is that ease of doing business is a consideration primarily for the customer. He says, “Many organizations still do nothing to take stock of how attractive an organization they are to their suppliers. An unattractive customer might have unnecessarily onerous terms and conditions, fail to settle invoices on time, be unreliable, and fail to capitalize on supplier improvement suggestions.”
He adds, “It makes just as much sense for buying organizations to make themselves as attractive and easy as possible to do business with, in the same way as selling organizations.”
Supplier awards initiatives
Special recognition and appreciation have always instilled strong sentiments of commitment and a desire to outperform the competition in individuals and their organizations.
As a three-time winner of General Motor’s Supplier Award, Robert Rudzki, former Chief Procurement Officer at Bethlehem Steel says, “Folks at Bethlehem Steel didn’t need a lot of convincing to understand the motivational pull that an awards program can provide.”
Several companies have utilized awards functions as perfect opportunities to not only commend suppliers but also as a platform to build co-operative business alliances. With many companies entering into their third decade of awards programs, there is little validation needed to justify the merit of these initiatives.
Ever since the ability to respond to changing business conditions became a strategic priority, most global corporations who once wielded clout upon their suppliers have shifted gears and now endeavor to become the “customer of choice”. Specific award programs (such as Nissan’s Zero Defect Certificate.) help organizations to better understand each other’s concerns and set the stage for a greater degree of involvement towards a mutual objective. These interactions also help the customer organizations and the suppliers appreciate the importance of being easy and flexible to do business with, in sustaining long profitable alliances.
Leveraging technology: collaboration programs at HP and Rolls-Royce
Poor communication and collaboration often means that contracts are not finalized and the global supply chain does not function properly (Lysons and Gillingham, 2003). Therefore, there is plenty of incentive for companies to invest in ensuring that they have the knowledge and tools necessary to do business effectively and efficiently.
Many new technologies have helped promote communication and collaboration. “HP uses a number of new systems, and we are always trying to keep an eye on any new technologies that may be beneficial to the company,” says Diane Homolak, HP’s Director of Legal Quality and Operations in the Americas. “We employ a number of new techniques in contract management, such as tracking agreements and automatically identifying any issues which may delay negotiations.”
She also adds “Good relationships are essential, and for this reason HP prefers to have fewer suppliers but to have much stronger relationships with them, and collaboration is one of the main drivers of the company’s success. Collaboration should be not only with suppliers, but also within industry. This helps to introduce new standards, sharing knowledge and developing new successful strategies.”
HP also launched the SER (social and environment responsibilities) program. This program is very successful worldwide, giving staff a good understanding of the regions they are sourcing from. HP also ensures that all of its suppliers have a good knowledge of the program, which allows them to collaboratively improve processes.
Rolls Royce also provides several good examples of how strategies promoting communication and collaboration can be successfully implemented. For example, it introduced the ‘Suppliermanager’ website, which gives its suppliers a guide to how they can handle their strategies successfully. This has helped to encourage consistent improvements across the supply chain.
Other systems at Rolls Royce which have helped to improve communication and collaboration with its suppliers is SABRe (Supplier Advance Business Relationship) system and the NTS (Notice to Suppliers). These systems facilitate the opportunity to automatically send the company’s requirements across the supply chain, improve the product development process and help suppliers meet quality requirements. Effectively, this provides a common platform through which companies throughout the supply chain can share information.
Instilling ease of doing business ideologies across all levels of the organization
Organizations should also value communication across all levels, not just senior management interactions. A supply chain group at a large oil and gas exploration company stated that relationships with their major suppliers were fantastic —
their vice presidents frequently involved their counterparts in important meetings, presented supplier awards and there was a lot of collaboration “at the top”. But the project managers who actually handled the engagements had to “fight it out” on a daily basis. As a result, operational gains from initiatives such as supplier awards did not reach their full potential.
This disconnect between the senior management’s efforts and the operational tactical level within the customer organization has an impact on the day-to-day performance and ultimately affects the bottom line. To avoid the above mentioned “fight it out” scenario, it is essential for organizations to build and sustain relationships with their partners across all levels, and not just at the very top. This can only be achieved if “relationship building” ideologies are propagated throughout the company, and become part of the corporate culture.
Including programs that provide employees with the skills that will help them build deep relationships right from their training and induction sessions certainly go a long way to ensuring the ease of doing business factor for your organization. However, relationship building programs should not be forced on the other party; they should, rather, be integrated as a part of the regular service that is offered.
Role of the contracting function
Often, contract groups which take up engagements or projects focus their efforts on anticipating failure, and as a result develop contract strategies and business terms that are primarily based on allocating risks to their trading partners.
IACCM finds increasing evidence of the limitations of this approach, as it creates a confrontational relationship from the outset. The lack of trust and goodwill between the partners does not promote an atmosphere to reap the benefits of partnering, like information exchanges and large-scale collaboration.
In any engagement between business partners, individual interactions form the basis of communication, collaboration
and the relationship as a whole.
One of the key concerns for companies is to ensure that they have the right people with the relevant knowledge. McKinsey’s The Next Revolution in Interactions states, “As more 21st-century companies come to specialize in core activities and outsource the rest, they have greater need for workers who can interact with other companies, their customers, and their suppliers”.
Contract managers who handle accounts usually become this point of contact between organizations. Their roles thus become increasingly significant in shaping the relationship between them. The question then is what initial steps can a contract manager take to ensure that his group is considered as easy to do business with?
In a recent interview, Harvard Business School Professor, Rohit Deshpande talked about Singapore Airlines and its winning customer-centric strategy. According to him, Singapore Airlines has excelled at the art of managing customers at every touch-point. An important component of its effort is a superb database which has information on their passengers’ preferences.
This sort of a memory log of preferences and “lessons learnt” assists in better identifying the needs of the partner organization. Similarly, the contract manger can research the database to understand the needs of a particular account and ensure they are being satisfied. This will also help new contract managers who lack experience with a client.
Since most global organizations handle large volumes of active contracts at any given time, customer segmentation and prioritizing accounts is important. The use of metrics to track a specific customer’s deliverables is also useful.
The next step should be identifying specific painful areas and resolving them quickly. Most customer-centric best-practice companies provide feedback questionnaires. Customer feedback analysis immediately brings neglected issues forward. As is the case generally, not many might remember to praise a particular thing done right, but few hesitate to complain.
However, in the pursuit of becoming favorable to do business with, it is also necessary to be aware of when such efforts begin to get in the way of organizational goals.
There are always different customers, project office personalities and several factors that might drive variations in approach. With the use of efficient measures it is important to track the resources and time being utilized in a particular engagement and to be alert for opportunities to better utilize these resources elsewhere.
A familiar grievance in many organizations in the context of building long-term relationships based on trust is that after a while the partnerships become overly comfortable, and there is the risk of the partner organization becoming complacent. It re-affirms the fact that while prioritizing your efforts on winning customer loyalty is important; the ultimate goal is still to ensure the success of the business.
Finally, would it make sense to focus on ease of doing business given the current economic conditions, especially when it appears that customers are valuing only cost take outs?
There is growing evidence that confirms the success of this approach. As we have observed in the past, these economic trends
are cyclical and pampering customers and helping suppliers when things are hard is perhaps the best time to affirm one’s organizational stance as “wonderful to do business with”.
IACCM, UK office:
Analyst, IACCM, US office.
Integrating service level agreements and balanced score cards within your relationship management
Implementing both the service level agreements and the balanced score card within your relationship management will offer you key advantages, discussed in this article. While the SLA and BSC have similarities, there are distinct differences, and the advantages of integrating them far outweigh the cost and burden of deploying them.
ASHIF MAWJI Upside Software
by ASHIF MAWJI Upside Software
• The service level agreement (SLA) and balanced score card (BSC) have a similar “flavor”, however there are distinct differences: you need to integrate both to be successful.
• The advantages of including both SLAs and BSCs in your relationship far outweigh the cost and burden of deploying them.
• Integrating them within your organization will be challenging and some tips are provided that may help you overcome these obstacles.
• Proven technology is available to help integrate SLAs and BSCs: you will need to decide if you want specialized or holistic solutions.
Differences and similarities between the SLA and BSC
According to Wikipedia, the BSC began as a concept for measuring the alignment of the smaller-scale operational activities of a company with its larger-scale objectives in terms of vision and strategy. In 1993, Robert Kaplan and David Norton began publicizing the balanced scorecard through a series of journal articles. In 1996, they published the book The Balanced Scorecard.
A SLA is a formally negotiated agreement between two parties. It is contained in a contract that exists between customers and their service provider, client or between service providers. It records the common understanding about services, priorities, responsibilities, guarantees, and so on — collectively the level of service. For example, it may specify the levels of availability, serviceability, performance, operation, or other attributes of the service, such as billing. It may even outline penalties in the case of violation of the SLA.
Two similarities between the SLA and BSC are that both:
· are easy to conceptualize but challenging to implement well; and
· report on a few critical elements of a more complex relationship.
They should be used to complement each other, particularly in managing relationships. The BSC is a framework for reporting on SLA performance and also offers a reliable and proven methodology to implement proper internal SLA management.
Value gained through effective integration
In managing relationships, communication is paramount, but this can become complex in large organizations, especially with longer-term agreements. Designing what’s important for success (critical success factors) and having mutual agreement is fundamental to a successful relationship. Documenting these elements appropriately and then measuring and providing relevant reporting/alerts can help instill visibility and ensure proactive resolutions.
A well-integrated SLA and BSC program with jointly agreed measures that will be reported in a timely manner can help to create a “balanced” contractual agreement between client and their supplier/partner. Ensuring the parties have full visibility of these measured elements will promote an open and symbiotic relationship, resulting in quicker resolutions and optimal delivery.
Some other benefits of integrating the SLA and BSC:
• it helps both the customer and the supplier to work towards a shared vision, goals and objectives;
• it aligns the client organization’s picture of the future (shared vision) with business strategy, desired stakeholder (internal and external) behaviors, and day-to-day operations;
• strategic performance measures are used to better inform decision-making and show progress towards desired results;
• it measures what matters the most;
• it identifies more efficient processes focused on client needs;
• it improves prioritization of initiatives;
• it improves internal and external communications;
• it improves alignment of strategy and day-to-day operations;
• it links budgeting and cost control processes to strategy; and
• it provides auditable contractual compliance to jointly agreed measures.
How to effectively integrate the SLA and BSC within your organization
In a buy-side process, it’s important to establish the concept of BSC and SLA during the request for proposal (RFP) process. Internal stakeholders should include a draft list of BSC and SLA criteria in the RFP and solicit supplier feedback on these elements. Ultimately, you want mutual agreement from both parties on all of the elements, so the earlier you can establish the need to include this in the relationship management, the better the buy-in. You will find that suppliers will be keen to implement these in their relationship management, especially if they are provided the opportunity to collaborate and be a key part in formatting the metrics that will be measured.
Some suggestions to get started
Get internal agreement on the key measures for both the SLA and BSC.
Include these in the RFP and ask for supplier feedback, including if they wish to make changes to the list.
Include these elements in the contract negotiation check list.
Include the final list in the contract.
Establish a reporting schedule to review the measures, progress and escalations.
Make all stakeholders, internal and external, aware of the SLA and BSC measures, including thresholds (such as, what means success, what should trigger action).
Include the criteria within the tools/systems used to measure.
Advertise your successes in implementing these measures and always continue with the buy-in process, both internally and externally.
In the sales-side, Figure 1 depicts the process used to develop measures in a BSC. The above buy-side process can be used to garner buy-in and adoption.
There are numerous software providers who exclusively focus on SLA and/or BSC management and can provide excellent tools to effectively manage the criteria for these initiatives. Some of the more robust contract management software providers have such functionality included within their products, allowing for a holistic post contract management approach that’s fully integrated with all the other elements of contract/commitment management.
The organization needs to decide if it wants to implement several systems and then integrate those systems, or to look for a holistic system that offers components of contract/commitment management as well as SLA and BSC management.
Some of the features you should look for in a solution
• It provides strategic information about your BSC measurement system to internal and external stakeholders.
• It communicates BSC strategy across the organization.
• It provides increased visibility, accountability and transparency.
• It automates the delivery of key reports.
• SLAs are included in the contractual agreements, enabling measurements, including automated data capture from line of business systems.
As you can see, implementing the SLA and BSC within your relationship management will offer you key advantages and is definitely a worthwhile exercise to undertake. There may be some divisions within your company already performing a similar
activity, so it’s important to find out what’s working and what’s not working so that you can adjust your implementation to give you the best changes of success. There are a number of resources on the internet that can help you build this program within your organization. One of these sites is: www.balancedscorecard.org, where you will also find useful links to consultants and other resources that can help you.
Ashif Mawji, President and CEO, Upside Software Inc,
Provider of contract lifecycle management software,
About the Author:
Upside Software is Canada’s Top 100 Employer (2009), the ‘2007 Supply & Demand Chain Executive Top 100 Company & 2006 Deloitte Fast 50 Company’. Ashif was named the Entrepreneur of the Year by the Business Development Bank of Canada in 2007 and also the 2002 Ernst & Young Entrepreneur of the Year® recipient (Prairies Region – Young Entrepreneur), recognized as the 2008 Supply & Demand Chain Executive Pro to know, ranked as Canada’s Top 40 under 40TM (2004), a member of the Financial Executives International and was recently awarded the Queen’s Golden Jubilee Medal.
Western influence on Eastern contracting styles
This article is a brief summary of interviews conducted with contracting executives from a range of Asian countries and Australia on their perceptions of Eastern and Western contracting styles. From the responses, it appears that Eastern and Western companies are learning to deal with each other and are working through the inevitable cultural differences.
DOUG HUDGEON Macquarie Bank
BY DOUG HUDGEON Macquarie Bank
I was recently told an anecdote by several members of a shared services team based in Sydney and New Delhi. They had just held a team video-conference with over 100 participants on one side of the video-conference and 40 on the other side. By all accounts, the meeting was a success. The heads of each function spoke briefly and eloquently about their team’s contribution and all speakers were ”on message”: One Team.
Then, as a further team building exercise, a Mexican Wave was planned.
Once the New Delhi team’s confusion was resolved over what exactly a Mexican Wave was, and how exactly one executes it, the Wave started, faltered, started again and was eventually completed. Everyone I spoke to mentioned the Mexican Wave; it was the standout feature of the video-conference.
The incident highlights how a small cultural misalignment can dominate the other aspects of an otherwise seamless event. But it also highlights one other critical aspect: during this incident, the teams on both sides learned something about each other and this shared knowledge will make them a more resilient team in the future. The Australian side has become more aware of cultural differences and the Indian side has become better at adapting to Western culture.
When IACCM sent out a request to its members to contribute their thoughts on the Western influence on Eastern contracting styles, I wasn’t sure what to expect. What I didn’t expect was the incredible diversity of responses. Reading through them for the first time was an almost overwhelming experience. Western contracting styles were described variously as too flexible and too rigid. Eastern contracting styles were both too procedural and not procedural enough.
Nearly everyone, however, spoke about the merging of traditions in companies highly experienced in dealing with their Eastern/Western counterparts in the region. Just like the shared services team in the opening anecdote, Western and Eastern companies are learning to deal with each other, are working through the inevitable cultural misapprehensions and commerce is flowing.
Communicating the content of the responses has not been an easy task because, while each contributor was internally consistent, the cacophony of opinion defies summarization. Perhaps this is because asking people to comment on Western influence on Eastern contracting styles is a bit like polling an atheist, a religious zealot and an agnostic on which God is most powerful. The answers range from ”none” to ”mine” to ”who cares”; and the mean is meaningless.
I’ve decided to give you a flavor of the language used by the respondents by including a selection of their responses. I have edited the phrases for brevity and have endeavored to retain the meaning. Do not expect consistency between the phrases.
We’ll first look at the phrases used to describe Eastern and Western contracting styles and then at trends highlighted by the respondents. The comments on styles and trends are taken from the written responses received and this may bias the answers towards the “politically correct”. This bias is probably more evident in the “Trends” section because all respondents predicted that contracting styles would become more similar over time, and have improved over the course of their experience.
We hope to continue to collect and collate telephone or personal interview responses over the coming months and will publish these (protecting the identity of the respondent). We are interested in seeing whether less utopian viewpoints appear over the course of these interviews.
Eastern respondents’ comments
The following phrases have been extracted from approximately a dozen respondents who identified with the Eastern contracting style:
• Relationship is important;
• Our communication is expressed implicitly;
• We are respectful to age and seniority;
• We are more straight-forward but less assertive;
• We have more bidding and tendering;
• Real business is conducted in a less business-like environment;
• We rely on relationship to resolve issues;
• Relationship is everything;
• Face to face contact is important;
• Our legal counsel sits with the business, their legal counsel is separate from the business;
• We are too soft; They (Western style) are too aggressive.
• They are legalistic;
• They have competitive negotiation;
• Their contracting process is time-consuming and slow;
• They are willing to have an argument over terms;
• They rely on protection of the law;
• They are slow to move towards approval;
• They are too procedurally rigid;
• They are too procedurally flexible; and
• They rely on email.
Western respondents’ comments
The following phrases have been extracted from a dozen respondents who identified with the Western contracting style:
• Their (Eastern style) emphasis on procedure is stifling;
• They are unwilling to argue, but will stall instead;
• They are less confrontational;
• They are lacking in urgency;
• Their business people focus on business terms;
• They are fast to make business decisions, and slow to respond to contractual queries;
• We have more legal involvement;
• We are more confrontational; and
• the contract is the end of negotiations; for them, the contract is the beginning of negotiations.
The following words and phrases were used to describe the trends that the respondents observed:
• Like the intermingling of two liquids;
• Global guidelines with local adaptations;
• The importance attached to relationships has evolved since the 1980s;
• Proper contracts, bidding processes and involvement of legal firms are very much in place in the big cities to ensure interests are taken care of;
• Compromise is acceptable with "approved risks";
• We have one contract system globally;
• We use our Asian contract terms but there is little difference between those and the terms Western companies use;
• Western companies are more willing to allow liquidated damages clauses to remain in the agreements because they are enforced so rarely;
• Western companies are becoming more understanding and flexible due to the importance of Asia as a marketplace and the rise of Asian companies competing head-to-head with Western companies;
• Standard contracts are becoming more well balanced; and
• Contracts used to be secondary, with price and delivery the only contested terms. This has changed in the last five years. Corporations are now open to discuss warranty, payment terms, change orders and many other terms, and adopting a flexible approach.
• Western partners are becoming more flexible in their contracting The parties are taking a “bottom-line” approach (including velocity of deal flow) to resolve issues when cultural issues make progress difficult.
The importance of experience in contracting with Eastern/Western companies
The common theme was that the more experience a Western company has in the region or the more experience an Eastern company has dealing with Western companies, the more similar they are in approach.
• If vendors are inexperienced Asian companies, they will often accept long contracts without fully understanding the content if the business terms sound right to them.
• Western companies tend to dominate the relationship style with inexperienced Asian companies. As the Asian company matures in its international experience, its influence grows, particularly where the legal and regulatory environment favor the Asian companies.
• Smaller local Asian firms do not engage legal professionals and negotiations are casual and informal.
I haven’t included in this article the longer extracts from conversations I have had with contracting professionals around the region, but will do so over the coming months and will publish these on the IACCM website. We’ll advise the membership of the location of these longer extracts once they are published.
About the author
Doug Hudgeon is procurement professional with over 10 years experience in procurement and sourcing in Australia.
Doug is a solicitor from Canada who has worked in Australia over the past 12 years as a consultant in legal, contracting and sourcing fields for both large and small organizations. In 2006, Doug joined Macquarie Bank as the Sourcing Manager, moved to work on a global procurement project involving companies owned by Macquarie, and is now responsible for managing procurement in Macquarie’s Global Financial Services Division.
From the front line...
Your letters and questions
RFPs that include NDAs and master contracts
From Rob Rowe. 22 May 2008.
Quite often, my company responds to RFPs [requests for proposals] that include, first, our signing a one-sided NDA [non-disclosure agreement] — which does not protect anything we provide as a response to the RFP from further disclosure — to merely get the RFP; and second, the RFP contains a typically one-sided contract template (all clauses slanted towards the solicitor) that the solicitor includes as part of the RFP. Conditions for both agreements are usually posed as a take it or leave it scenario. As a contracts department leader, my team is often subjected to pressure from the sales arm responding to the RFP to accept these agreements as is, because they do not want to seem “hard to work with” and do not want to provide a response with “too many red lines” if we take exceptions. This puts our company in a difficult position if we win the business, as the RFPs clearly state all responses are … to be included in a definitive agreement, if awarded.
I would like to see how others in the contracting world have dealt with RFPs that include one-sided agreements in favor of the solicitor, and how they deal with pressure from within the organisation to look the other way on bad terms in the contracts within the RFPs.
Mark Hope: As regards the NDA issue, in terms of protecting your submission and information, I suggest you insert a copyright and confidentiality statement on the cover sheet/first page, as this is easier than entering in to negotiations on the NDA and delaying release of the ITT [invitation to tender] to you.
As regards red lining terms, this sounds like a cultural and educational problem that is resulting in the pressure being exerted upon you by your own sales people. My advice is that you just bite the bullet and do what you need to do, as if the terms are biased and unfair then they are and there is no getting away from that. Any experienced solicitor/commercial person receiving your red line will know that you are only responding as most of us would. We’ve all been there with our own people fretting about red lining, but I can only recommend you soak up the pressure and do what’s right and keep educating your own the best you can.
The real problem you have is where the procurer’s legal/contractual representative isn’t experienced and/or the UK local public sector type approach. While a gross generalisation, this sector often operates on the basis of lowest priced fully compliant bid wins and their procurement rules dictate this approach. Ultimately, your company needs to make a decision as to whether you can operate in this sector and accept non-negotiable terms that normally you wouldn’t and manage the additional risks.
I can only conclude by saying we are with you, as most of us have been there. Just remember that no amount of pressure from a salesman who doesn’t understand the terms makes it right to accept them blindly — you are not wrong!
Catherine Uffen, M.A. J.D: In one case, I suggested to a huge global organization that if they wanted to own all of the software information that the NDA would give them a right to, they should just buy us outright now and get it over with. They got their senior solicitor. My suggestions were reasonable. We got what I wanted. We even got what I wanted when the method was on-line. We got their senior solicitor — they agreed to a hard copy side contract. You need to get away from sales guys having this authority. Of course, they resist you because they’re getting a commission. You’re not and you’re paid to reduce risk. … Insolvency terms are on everyone’s minds (even in RFPs), so this is the time to pressure management to get the control you need to protect your company.