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A new study from Vantage Partners outlines 20 best practices that transform a key supplier or outsourcing provider relationship from an adversarial set of contract negotiation and contract management interactions into a collaborative partnership that maximizes sustainable value. No one practice, however, was the "magic bullet," says Partner Jonathan Hughes, co-author of the research.

Vantage Partners, which is based in Boston, Massachusetts, is a spin-off of the Harvard Negotiation Project, which produced the popular negotiation book, "Getting to YES." Today, Vantage Partners specializes in helping companies enhance their capability to form and manage strategic relationships.

The study found that businesses increasing view their dealings with suppliers and service providers in a strategic light, focusing on achieving greater profitability through enhanced integration and collaboration - not simply by demanding lower prices - and in the process are dramatically changing the nature of the traditional company-provider relationship.

Today, outsourcing relationships "look more like strategic partnerships or alliances," says Hughes. "It's no longer about beating up the supplier to get lower per unit costs." The move into business process outsourcing (BPO) is accelerating this trend. Hughes says companies interested in BPO are motivated by not only by cost savings but also by business transformation and a desire to improve competitiveness. "Buyers want access to expertise and the ability to drive innovation to make them more competitive," reports Hughes.

Vantage Partners gathered data from senior sourcing, procurement, and supply chain executives at over 100 companies. Questions probed their relationship management practices with all key suppliers, not just outsourcing service providers.

The Economic Value of Strong Supplier Relationships

The study, entitled "Negotiating and Managing Key Supplier Relationships: A Cross-Industry Study of 20 Best Practices," discovered buyers realized significant economic value from strong provider relationships. Almost 80 percent of the respondents said their strong working relationships with suppliers delivered at least 25 percent more value than their poor, adversarial relationships. Respondents also estimated they would enjoy average savings of $43 million to their bottom lines if they instituted all 20 best practices.

The 20 best practices span the relationship life cycle. They describe the changing mind-set and new skills required for a successful outsourcing relationship in today's changing world.

The best practices are drawn from six fundamental areas:

1. Evaluation and selection
2. Negotiation
3. Post-deal relationship management
4. Performance monitoring
5. Termination
6. Portfolio governance and management.

Download Vantage Partners' "20 Best Practices for Negotiating and Managing Key Supplier Relationships".

A key finding was that the old adversarial model, which emphasized price over value, "doesn't deliver top-line growth or even sustainable savings," notes Hughes. It's difficult for adversaries to make decisions together efficiently, work together to deliver service level agreements (SLA), or diagnose and resolve performance problems when they arise.

The 20 practices also reflect the scope of the challenge associated with effective management of key supplier and outsourcing relationships. Traditionally, many customers have swapped their tough deal negotiation teams for new employees assigned to manage the on-going outsourcing relationship. "Just because you changed the people didn't erase the lack of trust," says Hughes. "These relationships are complex. They involve many people operating in different roles over long periods of time during which priorities and people change. Effective relationship management needs to be embedded in businesses processes, organizational structure, and corporate culture."

Using the Best Practices to Evaluate Potential Suppliers

Hughes recommends that buyers use the 20 best practices as a play book not only after a contract is signed, but from the outset when evaluating potential outsourcing service providers. "The practices help you asses which providers can actually work with you as a trusted business partner and lay out a roadmap for negotiating in a manner that sets good precedents for how customer and provider will deal with each other after the deal is signed," he posits.

The Vantage study found governance issues particularly thorny. Both parties need to find a way "to integrate planning, to spot new opportunities to drive efficiency and create value, and to solve problems when highly integrated operations make finger pointing and assigning blame an ineffective model for improving performance," says Hughes.

Vantage decided to undertake this study when Hughes and others noticed the work they were doing in the traditional alliance arena was converging with the work in outsourcing. However, Hughes says he was "surprised at the extent" to which mindset and management practices in the two arenas are merging. As buyers advance down the outsourcing learning curve and have experience managing several outsourcing deals, their attitudes change. "The more experience companies have trying to realize the value they set out to achieve through outsourcing, the more they become aware of the shortcomings of the adversarial model," Hughes reports.

Finally, Hughes says an important lesson from the study is that buyers should not manage all providers in the same way. "You do need to make some trade-offs, so it's important to know where value comes from," he says.

Lessons from the Outsourcing Journal:

• An adversarial approach can not deliver strategic value, a Vantage Partners study has discovered. A more collaborative approach enables customers to reduce the transaction costs of working with outsourcing providers and to realize higher levels of performance and innovation.
• Strong service provider relationships produce at least 25 percent more value than adversarial ones.
• Most companies would benefit from improving their relationship governance capabilities. Governance focused on joint planning and relationship management delivers more value than old approaches to governance focused on control and compliance monitoring.
• Companies following the 20 best practices outlined by the study will have a blueprint for effectively managing outsourcing relationships.

Publish Date: August 2003

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Copyright © 2003 - Everest Partners, L.P.

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