In some situations in there is tremendous advantage in maintaining long-term relationship and engagement with a vendor. Being able to leverage and build upon the knowledge gained along the way, consistency in approach and increased agility by reducing ramp up time. But there are effective and not so effective ways to establish and manage these relationships. It is not uncommon to hear the relationship referred to as a partnership, but this is not only inaccurate, it increases the likelihood of failure in achieving an optimal outcome. The word partnership infers that both parties are working toward a common goal, and that is rarely the case unless risk is equally shared in the requirement. For example, two organisations may work together to establish a new capability that one will run and the other will benefit from. Otherwise, the vendor is likely to have an interest in the outcome of a project, but only to the extent of wanting to be associated with a successful project so they build their reputation in the market. Being successful and appearing successful are much the same outcome for them. The primary objective is, and must be, for their business to be profitable and successful. Therefore it must always be remembered that they are driven by a different set of drivers and have a different view of success in the relationship.
So what are the key risks in adopting a policy of single souring requirements on a regular basis?
Price creep and padding
Often this is surprisingly difficult to spot, usually due to poor record keeping and reporting. It is particularly common where the vendor is engaged under many short-term contracts, especially if the contracts spread across different areas of the organisation. It may be a sneaky 2-3% increases or it could be arrogant 12-20% increases. If there isn’t a central repository for rates made visible to decision makers, it is virtually impossible to spot. The other method of maximising their slice of the available funding is through increasing the number if hours allocated to the work or lifting the level of the resource, using a highly experienced and expensive resource to complete a task that could be completed by a lower level resource. These issues are exacerbated if the vendor is permitted to quote lump sums for work without breaking down the effort and resources used. While this could be acceptable in a competitive process, where you can cross compare to other offers, in single source situations it will make value for money assessment challenging to say the least.
Obviously the advantages for the vendor is an increase in revenue and happier staff as they are under less pressure to deliver.
Loss of risk sharing
Risk sharing is an important lever in ensuring the vendor delivers the desired outcomes. This is not risk sharing to the level of partnership, as mentioned earlier, this only occurs in rare situations. The most common method of establishing risk sharing is achieve through tying payment’s to deliverables or milestones. For example, if a consultant is engaged to carry out a research study on a new concept, the contract could be configures to permit a payment at the completion of a series if workshops, another on completion if a draft report and a final payment on acceptance of the final report. If the vendor completes the task late, then they get paid late, if they don’t complete the task, they don’t get paid at all. If they use more resources to deliver the outcome, they are less profitable, if they use fewer resources and still deliver on time, then they get an increased margin and we get our report early. Loss or delayed payment is the risk that they share as that is the primary objective they have in the requirement.
Where single sourcing has become the normal method of engagement, it is not unusual to find the engagements have also moved to hourly rate engagements or even a “retainer” model with no deliverables attached. The risk has shifted entirely to the organisation and under this model and the incentive for the vendor is to take longer with more resources to increase their profitability.
Limiting the market
Awarding work to the same vendor repeatedly becomes increasingly damaging to the capacity of the organisation to build competitive tension in processes. Even if “competitive” processes are conducted, awarding to the same vendor repeatedly will shift too much intellectual property to one vendor giving them an unfair advantage and making them very difficult to beat. Further to that, the organisation will get a reputation for being non-competitive and other vendors will either refuse to bid or out less effort into a bid. Once the reputation is wide spread, even processes that are in fact genuinely competitive will be viewed with suspicion by the market.
Cross selling and up selling
This is viewed as such a major problem within some organisation that contracts with include clauses that preclude any sales efforts from engaged resources. The issue with an engaged resource undertaking sales activity is that it is an attack from the inside. Management will begin to view an engaged resource as a trusted employee and as such will drop their “sales guard” and be more susceptible to “helpful suggestions”. Suggestions that will often lead to scope creep. Where a vendor is engaged repeatedly, this trust level extends to periods in between engagements.
The risk associated with this problem is that the organisation can find it’s strategies and project selection skewed by an external input. It is also a common path for unplanned expenditure that can leach away available funding, often bypassing normal planning and approval processes.
Deferred accountability
There is a double-edged issue here. One is that the management in the organisation can become dependant upon the “perceived expertise” of the vendor and start deferring responsibility of decision-making to the external supplier. At the same time, the contractual structures are weakened to a point where legally the vendor has no responsibility for information provide, advice given or decisions made. The result is an environment where recommendations and decisions driven by entities that have different outcome incentives and no real responsibility in achieving the core goals.
Close relationships risks inappropriate behaviour
There is a myriad of risk associated with an overly close relationship between decision makers in an organisation and the vendors. It increases the risk of bias, lost IP, leaked commercially sensitive data, loss of innovation, damage to the organisations reputation and ultimately the loss of the ability to generate competitive tension in the supply market. The darker side of those relationships are the real, perceived, intentional and inadvertent breaches of laws and policy around gift receipt, bribery and fraud.
While close working relationships with suppliers can sometimes provide tremendous benefit, the relationship must be framed in a clear structure of understanding the boundaries, interfaces and processes that are acceptable within the dealings of the relationship.
So what is the alternative
As we have already recognised, there is sometimes great benefit in maintaining a close and long-term relationship with a vendor. The objective with establishing this relationship lay in prior planning and careful consideration. Identify the requirement and what the objectives of the relationship are. Set some boundaries of the scope of work included and be clear about the out of scope area’s. Define what is acceptable behaviour and what would increase risk, identify clearly a process for engaging to discuss new requirements and propositions.
Take all of this information and build a specification and then assess the best method of engaging with the market to fulfil the requirement. It may be that you have a supplier that has demonstrated a clear capability to deliver the requirement and maybe a direct negotiation process is the best option. Maybe there are a limited number of suppliers suitable, so a limited market approach is best, or maybe we are looking for the most innovative solution available and throw it out to an open market process. The message here is that the selection of the provider should be considered carefully, not something that the organisation drifts into for convenience.
Critical to the ongoing success of the engagement is the model for requesting and agreeing to new work. Where the requirements can’t be specified in a definitive list of goods and/or services that can have a fixed price attached, the arrangement should include a vehicle for requesting, reviewing and negotiating packages of work. Each package of work should have a process for internal approval and clear agreement of the expectations and consideration documented. Pricing models should be established that considers volume discounts so that if demand increases, there is no need to renegotiate when the vendor has the greater power.
Each engagement must share risk at least to the point of withholding payment until deliverables or milestones are accepted (not delivered). By establishing a solid framework for the relationship and a clear process for engaging under the arrangement, the best of both worlds can be achieved where value for money can be achieved and an agile, dynamic supplier engagement model provided to meet an agile and dynamic demand stream.