Are You Asking for Trouble? Part 1

tired-exhausted-businessman-in-trouble-double-exposureImagine that you are reading the Sunday paper. You suddenly see your vendor’s company name in an article about their stock value plunging on news that they were experiencing “constraints” delivering their services. On August 10th, that very thing happened to the customers of Swift International (Swift). “Where Have All the Trucker’s Gone?” Sunday Aug. 10, 2014 New York Times.

Apparently, Swift (and presumably other logistics providers as well) cannot find enough qualified drivers to work for wages that have decreased up to 6% on an inflation adjusted basis in the last decade. Those customers that had not already heard the news read about it in the paper. If you are a sourcing, contract or procurement professional, this type of news should cause you to pause and reconsider your vendor pool.

Some companies and their service providers may have gone too far in asking for and attempting to deliver savings. In some circumstances, savings have apparently come at the cost of performance. Swift is not the only service provider to face pressures to reduce costs and had performance challenges as a result; it is merely the company in the spotlight at the moment.

Traditionally, buying companies would seek to limit their risk exposure by diversifying their vendor pool. In the logistics industry, dedicated carriage or fleet leasing arrangements have been used to reduce both parties risk as well as reducing their costs in re-bidding.  But if a lack of drivers, or any other kind of qualified personnel in your industry, means that a diverse pool of vendors will face the same challenge, it is time to do something different.

The answer lies in the method the buying and selling company uses to negotiate value. Most companies think that using a collaborative negotiation approach should be reserved for the service providers who are already performing well. That’s a huge mistake.

Negotiating Value

In research, conversations and personal experience as contracts attorney, buying companies have placed a lot of pressure on themselves and their vendor pool to deliver savings—in some cases guaranteed savings.

The problem with this pressure occurred in the bargaining process not with the attempt to control costs. Both the buying company and the service provider spoke only of claiming their value (each attempting to capture as much margin as possible), rather than about ways in which to create and then allocate newly created value. The book, Getting to We, outlines three ways business people negotiate value. Negotiators can claim value (literally take the largest share of a limited resource), create and then claim value (expand the pie and then take the largest share of that pie — a limited resource) or they can create and allocate value for mutual gain.

Allocating Value is Not Claiming Value

This third method for negotiating value is a literally a framework. Unlike conversations centered around claiming value which are one off events, the two companies are in effect structuring an approach to work together to solve problems associated with rising costs, disruptive innovations and pressures to reduce costs.

Allocating value may seem too good to be true: it is not. Allocating value is real and companies have done it. The article “Unlock Value By Decreasing Vendor Risk”  describes how two companies successfully allocated value by decreasing risk. Establishing a financial framework instead of a one-time negotiation to fix the fee does require a significant shift in both companies’ mindsets.

Allocating value is premised on two pillars. First, both parties have a What’s –In-It-for-We attitude. This attitude is the philosophical mantra for all highly collaborative relationships, and for allocating value.

To truly deliver savings without sacrificing one company at the expense of the other, both companies need a we mindset that is the opposite of the mindset used by negotiators when claiming value for their company.

If you accept the we mindset, then you accept the reality that wages are going to rise at some point. Rather than shifting the burden to the vendor in a fixed fee agreement, the parties would seek ways to absorb the rising wages and to reduce costs in other areas. For example, one of our clients had success in re-routing its drivers to consume less fuel which off-set other costs.

In a value claiming negotiation the buyer may have chosen a traditional fixed rate or fee agreement believing that rising wages is not their problem—it is the vendor’s problem. It is an illusion that a fixed rate or fee agreement will shift the risk to the vendor and all the buying company has to do is enforce it.

The buying company still has the risk because it is the buying company that disappoints its customers when the buying company cannot deliver. Not a single one of the buying company’s customer’s cares who the carrier is and what the problem is.

A we mindset acknowledges that business environments change and the only successful way to truly tackle rising wages is to do it as a cross-company team jointly enabling innovation.

The second pillar needed to establish a value allocation framework is a set of negotiation norms that support problem solving and eliminate a culture of blame. Getting to We explains six guiding principles that all highly collaborative relationships abide by.

The principles act as negotiation norms. They establish the tone and tenor of the relationship and steer a fair course of action when establishing a value allocation framework. The six principles are: reciprocity, autonomy, honesty, equity, loyalty and integrity.

For the purpose of this article let’s focus on the interplay between reciprocity and equity. Reciprocity is all about the give and take in the relationship and equity addresses proportionality and finding a fair solution in extraordinary circumstances. Taken together, both companies would seek to give and take on the issue of rising wages, and agree to modify the contract to adjust for wage fluctuations (both increases and decreases) as a pass through cost to the company.