There are two keys to keeping a cost pass through fair. First, both companies have to establish a mechanism for minimizing the impact of the costs. For example, decreasing costs elsewhere or using labor more wisely to avoid overtime pay. Secondly, both companies have to trust the data whether the hourly wage, the hours worked or hours idling. Transparency is important. The more transparent the companies are in sharing data the better able they are to problem solve in a meaningful way.
By Way of Example
Say for example, that your company’s logistics provider immediately warns you that wages are rising, that the pool of available long-haul truckers is shrinking industry wide and they would like to brainstorm ways to address this issue with your company.
If you have a highly collaborative relationship, it is both companies’ problem, as it always has been. But instead of fighting over the price and demanding guaranteed savings, you and your service provider develop a framework for addressing rising costs.
The framework should incorporate these five concepts:
One: What’s-In-It-for-We mindset. Remember that as the buying company it is your risk to deliver to your customers. You do have a role in solving the pressure associated with rising wages, especially when those costs are industry wide.
Two: Have a balanced approach to cutting costs. The best solution will have actions by the buying company to reduce or use consumption more wisely and efficiencies on the service provider side. In other words, each is doing what it can control.
Three: Ensure reciprocity. No one likes feeling pressured to accept a bad deal. Too often in a value claiming negotiation, one company is giving more than it is getting, but as soon as the tide turns, the “loser” gets even in some way. Each company should give and get something out the deal.
Four: Develop an equitable plan to compensate the service provider for “idiosyncratic” investments, meaning those that favor only your company. If the solution to rising wages and too few drivers requires an investment by the logistics provider that solely benefits your company, the buying company has to compensate the provider for the investment. It is unwise and unrealistic to expect investment without a return. Likewise provider investments that will provide significant long-term savings, such equipment upgrades and system investments beyond direct labor, need to be compensated for.
Five: Get stakeholder buy in at the top levels and hold them to their promise to support the measures you’ve negotiated. There are negotiations where a senior leader at one company (the one with the power at the time) makes an unrealistic demand at the 11th hour that derails months of work by hard working team members. Bad behavior will literally freeze people out of the process and create an environment with little or no innovation.
You may have at least one at risk vendor in your pool and that vendor is likely facing pressures that are industry wide. Rather than take a more traditional value claiming approach to negotiating (or enforcing) the agreement, try establishing a value allocation framework instead.