The following two true scenarios are too often played out in a narrow business environment where parties resort to hardball tactics1 to get what they want in the short-term - but ultimately both led to losses for all.
Keith, the buyer, was applauded by his leadership team for driving down substantial prices on a large deal, but the trusting team later discovered excessive costs had arisen rapidly from several recent change procedures they failed to consider. No one saw this coming!
Mark, the seller, seeking to reap a higher sales margin, bumped up his product offering by selling more than what his client needed, but this conflicted with the client's operating system and led to delivery failure -- not to mention a huge profit loss for all involved parties.
When we consider a bidder that unproportionately slashes on a deal, undercutting all his competitors, does it not expose the deal’s lack of authenticity? It begs two questions. Where does the slash come from? How could the bidder still make a profit by competing at such low cost?
Consider a bundled deal as well that may seem attractive with some nice-to-have features, but raises the question: “how will such a deal benefit our organization? The problem arises when the focus is only on one issue, such as a low price that fails to include the bigger gains that would give all parties better results.
And what about shifts in the way we collaborate within current worldwide strategies for doing business. That alone serves up many good things but also challenges as well -- such as collaboration shifts…
The Shift in Collaboration
Today's business competitive challenges are no longer just “between enterprises.” Our challenges have now pushed against the marketplace and all the uncertainties within. Digital technologies have also challenged the status quo paving the way for greater productivity and efficiency for companies to deliver. Add consumers expecting more from companies.
Resilience and agility have since became the buzzwords for businesses to sustain and thrive. This demands the need to change the way we work including changing our attitudes toward our customers and suppliers by seeing them as partners collaborating in making things happen. Quintessentially, we must ditch away the binary thinking that locks us into unproductive zero-sum games.
Whether your organization is a behemoth -- like Walmart, Domino's, Airbnb, or exists among the forward-looking small medium enterprises (SMEs) – companies, regardless of size or influence, cannot achieve outcomes that maximized value for all parties unless they have adopted good relationships with their partners, where they found novel sources of leverage and realized big opportunities.
Collaborative alignment approach is essential
For organizations to reap the benefits from their partnerships they would need to adjust their operation models to a collaborative alignment approach.2 They do this by sharing economies of scale, risk allocation, value creation, value capturing and value delivery by locking arms with one another’s complementary edges. Together, they think innovatively and cogitate expansively about options. They from a competitive lens-scape by evolving into a mutually beneficial balance between their needs and the counterparty’s objectives by using an approach that heralds the "I win, you win" model. The model focuses on value and relationship building.
That said -- what does the shift in collaboration entail? How can you surface and reap the benefits? Start with your buyers…
Buyers are enabled only with value-adding sellers!
Once they can take advantage of the widely available and easy to access information through technologies, both sellers and buyers settle on level playing field where each can make informed decisions before setting out a deal. In most cases prior to sending a Request for Proposal (RFP) a diligent buyer would have already checked out the various options, sellers, and alternatives -- by moving from intent to solutions (results).
Meanwhile sellers are expected to provide precise prescriptions that respond to buyers’ needs. In fact, a Gartner research report3 found that business-to-business (B2B) buyers typically spent only 17% of their time meeting with potential suppliers. In other words, the buyers were cognizant of what they wanted, and in some cases, they had already made up their minds of their purchases even before sellers were legally involved onsite. Hence, unlike the conventional selling, sellers would have little room to influence buyers' decisions.
Essentially, buyers seek value in a solution with prescriptive advice and practical support that will enable buyers to validate information out of the vast data; then dissect a complex purchase into simpler components that fit the purpose. Therefore, it is important that the seller understands the buyer’s requirements and provides a solution with a good value-proposition4 tailored to specified needs. This contrasts with sellers who use a transactional approach5 that will rarely be acceptable to buyers.
Digital Interfacing – success stories prove the value!
Technology advancement has made it easy for the business community to interface, that is, communicate, transact, and collaborate from multiple locations at the same time. Aside from the ease of use with the aid of Artificial Intelligence (AI) and blockchain technology, online information exchange can now easily be downloaded, traceable and made secure to promote agile governance. Decision making has also become easier, quicker, and more consistent through digital technology.
Over the years, many companies have taken up digitalization which has changed the way they interact with their vendors and customers.
One example is DBS Bank in Singapore that recently partnered with a Singapore tech startup company to work on a Proof of Concept (POC) 6 that automated their vendor contract review process leveraging on AI. They did this to help solve their pain points on the long time they had been spending on not only contract review but also on the inconsistent competing interests of stakeholders in approving contracts.
Another example is Walmart, the Fortune 1 company (by capital). Walmart engaged a United States tech startup company that used the automated chatbot feature to work on the price reduction of its tail-spend7 that represented 80% of its total purchase volume -- a cumulation of many very small deals.
The results they gained through digital interfacing generally reflected better quality, speed, consistency, risk governance, and savings. See Figure 1.
Figure 1. Collaboration shift in contracting through digitalization
Individuals are also becoming less visible in business because of digital interfacing. This trend tends to remove personal bias and create more objectivity when interpreting facts, data, objectives, and outcomes in making decisions. It also allows space and time for parties to reflect upon avoiding competitive behavior between parties that often occur in a face-to-face situation.
Moving from operation and obligation to strategy and commitment
Common scenarios that lead to dissatisfaction and loss of trust between the buyers' and sellers' teams include lapses in suppliers' performances, errors in Service Level Agreements (SLAs), contentions regarding job scopes, and price changes to ensure quicker signing of contracts.
For example, let’s say you spent much time on a negotiation with a private bank that finally resulted in a signed contract for all parties. You expected execution to happen in exactly the way all parties seemed to have perceived the contract. But you later discovered you were incorrect. A different perception by each party surfaced post-contract and revealed a customer rating that was not well understood.
What happened? A service level of 4 out of 5 in a customer rating means 'near perfection' to a provider of service personnel that handles customers' calls, but to a private bank that same customer rating represents the large capital customers would interpret as not good enough, and customers’ demand for compensation could result.
This is a simple example but I’m sure you get my point. Even with clear interpretation of service level, provisioning and scopes requirement specified in the contract, such undesired fallout is inevitable until a common understanding between parties is established.
In addition, parties in the above case were often too eager to kick start the contracting process centering more on working out the contractual clauses than spending time connecting8 and mapping out the differences. See Figure 2. Without the latter, parties cannot develop basic trust which makes it impossible for collaboration to happen objectively and fairly, because parties will be defending their own turfs rather than working together in achieving their common objectives.
Research conducted by the Boston Consulting Group (BCG)9 shows that 45% of corporates and 55% of startups are very dissatisfied or somewhat dissatisfied with their partnerships, even when the relationships started out very positively where both parties had enjoyed some early successes. It is therefore paramount for parties to first align with a clearly stated outline of what their common vision looks like, their goals clearly stated and values, strategy, and commitment specifically agreed before the contract is signed! Even after the contract is signed, these should remain their guiding principles when making decision.
Figure 2. Listen, set aside your own position, seek clarification when in doubt, eliminate blame, shift to problem solving and show good faith.
What causes disagreements between parties? Too often, the performance metrics mandated on the buyer and seller cause the most divergence between parties. The buyer moves toward initial cost savings overlooking the total cost of ownership of the project, and the seller gravitates towards closing the deal quickly. In other words, each works for one’s own interest.
In recent years, the emphasis on strategic relational partnership has gained traction particularly with the rise of economic threats on supply chain disruptions, climate changes, cyber thefts, the ongoing pandemic (turning endemic) plus all similar uncertainties evolving around the world. Within this, organizations have come to recognize the importance of their relationships with their strategic suppliers to withstand the odds. And the awareness of innovations has made it necessary for organizations to grow and gain new competitive edges in the market at a fast and efficient manner, which requires them to tap into the resources of their strategic partners. As such, various creative contracting options have arisen in the market that have influenced parties towards trust and relationship building.
Two examples of successful contracting models.
Relational contracting model10
The relational framework focuses on sustainable partnership with flexibility to foster collaboration occurring simultaneously with clear goals defined and governance structures to keep interests and expectations aligned. Each party has vested interest with stakes involved in fulfilling the objectives of the contract. The focus shifts to strategy and commitment in making things work eliminating potential penalty punishment against each other.
Comic book contracting11
This interesting concept aims to deliver the contract in a visual format that is user-friendly by capturing the essential details to improve comprehension. It was said to have gained mainstream acceptance and was used by Bankwest Australia with its customers.
The conclusion is simple. Inevitably the shift in collaboration will also bring about risk. The courage to make mistakes and fail will prove that not the fainthearted but the strong will survive well into the future where uncertainties grow larger every day.
Hardball tactics from a major leaguer, by PON Staff, Program on Negotiation, Harvard Law School, 25 Oct 2011 https://www.pon.harvard.edu/daily/business-negotiations/hardball-tactics-from-a-major-leaguer/
Collaborative business models: Aligning and operationalizing alliances, by Ard-Pieterde, School of Business & Economics, Vrije Universteit Amsterdam, and Man DaveLuvison, Sellinger School of Business & Management, Loyola University Maryland, ScienceDirect, 20 March 2019 https://www.sciencedirect.com/science/article/pii/S000768131930031X
New B2B Buying Journey & its Implication for Sales, Gartner https://www.gartner.com/en/sales/insights/b2b-buying-journey
What is the Value Proposition Canvas, B2B International https://www.b2binternational.com/research/methods/faq/what-is-the-value-proposition-canvas/
Transactional vs. relationship marketing: Key differences, by Demetra Edwards, Tech Target, 24 Nov 2020 https://searchcustomerexperience.techtarget.com/tip/Key-differences-between-transactional-and-relationship-marketing
Automated Contract Analysis & Intelligence (ACAI) with local startup Pactly, DBS StartupXchange https://www.dbs.com/startupxchange/stories-ACAI.html
Here’s How Walmart Is Using Artificial Intelligence to Keep Prices Low, Nasdaq, by Daniel B. Kline, The Motley Fool, 27 Mar 2020 https://www.nasdaq.com/articles/heres-how-walmart-is-using-artificial-intelligence-to-keep-prices-low-2020-03-27
Connecting can mean the difference between success and failure, Contracting Excellence Journal, World Commerce & Contracting, by Yvonne Sophia Low, 9 Oct 2020 https://journal.iaccm.com/contracting-excellence-journal/connecting-can-mean-the-difference-between-success-and-failure
After the Honeymoon Ends: Making Corporate-Startup Relationships Work, BCG, by Michael Brig, Stefan Gross-Selbeck, Nico Dehnert, Florian Schmieg, and Steffen Simon, 13 Jun 2019 https://www.bcg.com/publications/2019/corporate-startup-relationships-work-after-honeymoon-ends
A New Approach to Contracts, How to build better long-term strategic partnerships, Harvard Business Review, by David Frydlinger, Oliver Hart, and Kate Vitasek, Sept-Oct 2019 https://hbr.org/2019/09/a-new-approach-to-contracts , Meet the Author Series with Kate Vitasek: Contracting in the New Economy, World Commerce & Contracting https://iaccm.wistia.com/medias/oifoxb4nxn
Comic book contracting https://www.comicbookcontracts.com
Beyond Winning Negotiating to Create Value in Deals and Disputes, Program on Negotiation, Harvard Law School https://www.pon.harvard.edu/shop/beyond-winning-negotiating-to-create-value-in-deals-and-disputes/
Did you ever make a poor decision just to win a deal?, Contracting Excellence Journal, World Commerce & Contracting, by Yvonne Sophia Low, 8 Dec 2020 https://journal.iaccm.com/contracting-excellence-journal/did-you-ever-make-a-poor-decision-just-to-win-a-deal
ABOUT THE AUTHOR
Yvonne Sophia Low has been a professional in strategic sourcing procurement and vendor partnerships for 15 years, during which she added significant value to various multinational corporations (MNCs) focusing on cost and contract optimization, excellence and effectiveness, processes, and risk mitigation.