Too many customer-supplier relationships are like dysfunctional marriages. When a customer meets a potential supplier, the lying begins.
The customer lies about the extent of the problem – usually by understatement. The supplier lies about the benefits of their product. Then both parties insist on a watertight contract, and in the absence of trust, they assume the other side will eventually try to gain the upper hand.
Not long after the mendacious couple has tied the knot, they begin to realise the extent of each other’s lies. Blame starts flying and after a few weeks, months, or if they are lucky, years, the whole thing falls apart and the customer finds themselves looking for a new supplier, in the dating game known as ‘request for proposals.’
The relationship between customer and supplier has traditionally been adversarial, which is hardly surprising when sayings such as ‘the customer is always right’ have become unassailable maxims.
If in a marriage you said, ‘The husband is always right,’ it would be unacceptable. Why then in a customer-supplier relationship is it accepted? Of course, the saying does not mean the customer is literally always right. It means that the supplier is privileged to have the customer’s business and it is therefore in the supplier’s interests to pretend that the customer is always right, even when they are patently wrong.
This is clearly an unhealthy situation with customers lording it over suppliers. It is now time to build more balanced customer-supplier relationships, founded on mutual trust and respect.
Although firms are spending more on suppliers, they are not putting more effort into managing supplier relationships. A recent PA Consulting report found 44 per cent of firms underestimate the effort involved in managing their suppliers.
‘Over the past 15 to 20 years there has been a steady and inexorable transition of the IT budget from staff costs to non-staff costs,’ says Andy Kyte, a Gartner Fellow.
‘Most IT departments have retained the management structure they used 10 or 15 years ago. We tend to find that, even when 60 per cent of the IT budget is spent with suppliers, the IT procurement and vendor management team makes up only three per cent of IT department managers. Most chief information officers (CIOs) have not restructured their use of managers to reflect the increased dependency on suppliers.’
By contrast, large IT vendors have had 35 years of developing a strong sales culture. Account management and planning are core business processes. Kyte believes supplier investment in relationship management and planning leaves them dominating the relationship. And if equivalent effort is not put into managing suppliers, they can soon gain the upper hand with a divide-and-rule strategy – see BT case study .
Because many CIOs do not see the management of these relationships as critical, often the supplier deals with a less senior person in the IT department. This is a dangerous situation because the supplier’s behaviour and deliverables can have an enormous impact on the ability of senior managers to deliver value to the business.
‘It’s not so much that it is an adversarial relationship as it tends to be a relationship that is dominated by investment and attention from the supplier,’ says Kyte. ‘Also, the relationship tends to be ignored until something goes wrong or the point of contract renewal arrives.’
Horses for courses
Some CIOs are naturally more distant in their dealings with suppliers. Others prefer a more collaborative approach, treating each supplier as a business partner. But there are many relationships in between these extremes, and some CIOs are comfortable switching tactics depending on whom they are dealing with.
Euan Davis, a senior analyst at Forrester Research, says CIOs should look at the motivation behind the relationship before they decide on which strategy to adopt. He defines the three drivers as cost reduction, service quality and value creation.
‘If the driver is purely to reduce costs, then the relationship might be fairly adversarial,’ says Davis. ‘If the driver is to improve service quality, then the customer and the supplier have to work together. If they’re looking to create value – revenue sharing contracts, for example – the supplier becomes more of a business partner.’
If a company is buying basic commodity products in large quantities, the relationship between customer and supplier can easily be at arm’s length, says Charles Hughes, president of the BCS.
‘In this case, there is no need for the supplier to understand the customer in great detail or vice versa,’ he says. ‘At one extreme, there are straightforward contracts where close relationships are not necessary.
‘At the other extreme, when you are working with complex IT systems and endeavouring to deliver significant benefit and value, you do need an understanding. The first step is for the vendor to understand the customer’s needs, but it is also extraordinarily useful for the customer to understand the vendor’s motivations.’
But surely suppliers have the same motivation as everyone else? That is, to increase revenues, profits and market share. ‘All suppliers have reputations to uphold,’ says of Nick Kalisperas, director of IT trade association Intellect. ‘They want further business. They want to be known for good delivery. Suppliers aren’t solely driven by profits.’
Kalisperas believes there are benefits to having a collaborative relationship with all of your suppliers, even for the smallest deals. ‘If you’re not working effectively with your supplier, there’s no guarantee that the supplier will devote the necessary time, resources and attention,’ he says.
Many CIOs argue that adversarial relationships are the result of bad treatment by salespeople. ‘In many ways, the software sales industry is still the Wild West,’ says David Mitchell, head of software research at analyst Ovum. ‘There are, frankly, quite disreputable tactics that are very unpleasant on a commercial and a personal basis.’
It takes two to tango
A survey by Ovum published in April found that small and large firms are equally reprimanded by the buying community.
But Martyn Hart, chairman of the National Outsourcing Association (NOA), says it is not easy to apportion blame.
‘You would have to look at the whole economy. Firms should have rising profits quarter after quarter. You would have to look at the City and pension funds that expect returns from these organisations. You cannot just point to sales people,’ he says.
But Mitchell does not believe the problem is quite as intractable as that. There are things that suppliers can do to at least mitigate the worst excesses of commission-hungry salespeople. It is just a matter of willingness on the part of sales managers to put these structures in place, he says.
‘The only way to change behaviour in any of the software and IT services firms is to change the commission structure,’ says Mitchell. ‘People can have as much as 60 per cent of their total compensation based on commission and bonuses. That is very different motivator to, say, 10 per cent.’
Sales managers also need to get away from one-year commission structures, says Mitchell. Sales people should be rewarded on the total economic return from a customer over, say, a three- or five-year period. ‘That way, if you’re on that one account for a long time period and you make a mess in year one, you’re the guy who has to clear it up,’ says Mitchell. ‘If you’re a company that truly believes that customer satisfaction is important, then pay your people on it.’
The ‘t’ word
‘The biggest stumbling block to effective customer-supplier relationships is loss of trust,’ says Forrester’s Davis.
While salespeople could do a lot more to engender trust – see How Salespeople Work – CIOs are not above reproach. CIOs are often too focused on cutting costs. Squeezing the lifeblood out of a supplier’s margins does not win you any favours. This obsession with cost cutting largely exists because IT is often still seen as a cost centre.
‘I think CIOs need to be more on the partnership side of the business,’ says Davis. ‘They need to work out how to align IT to the business. IT should be a value centre. Partnership approaches to aligning IT with the business are on the increase.’
Vendors and CIOs should both be looking to create value. ‘Change on one side is not sufficient,’ says Kalisperas.
US negotiating expert Chester Karass, says there is always a better deal for both parties. If you understand each other’s motivations, you can often find areas where something is of value to one of the parties that the other one is happy to concede.
It is in both the CIO and the supplier’s interest to work together more harmoniously; to build relationships and share accountability, risks and rewards. This is the modern way – see London Stock Exchange case study .
‘Irrespective of the nature of the contract, the basic principles of a successful relationship should be the same,’ says Kalisperas. ‘And regardless of the value of the contract, the relationship between the customer and supplier must be a partnership.’
Gartner’s Kyte says smart IT organisations are developing a more strategic approach to working with suppliers and are gaining attention because the vendor receives reduced transaction costs and a lower cost of sale. The customer has more continuity of contact and a higher level of engagement at executive and strategic planning level in the supplier.
Paul Coby, CIO at British Airways, keeps healthy relationships with his suppliers by making a point of visiting them when there is not a problem. ‘Often, CIOs only speak to their suppliers when there is a problem,’ he says. ‘But by then it’s often too late.’
Kyte says the majority of CIOs are untransformed in their approach to managing suppliers. ‘They only engage with suppliers when they want to discuss deals,’ says Kyte. ‘They negotiate purely on price, and ignore the supplier throughout the engagement from a management perspective, focusing only on supplier delivery management.’ Kyte says that CIOs need to move away from this ‘deal-junky’ mentality.
If you want the benefits of a collaborative relationship, you have to invest time and money in keeping it alive. Most IT departments do not spend nearly enough money or resources on managing their suppliers. How can you build a relationship when only spending three per cent of the IT budget on relationship management?
‘I think we’ll see more emphasis on relationships and less on technology,’ says the NOA’s Hart. ‘A CIO of the future might have been an account director at IBM, say, someone who is good at relationships and at getting the best out of people.’
Many analysts believe there will be an increase in demand for relationship skills over the next three years, but that the trend is still in its infancy.
‘In three years’ time you will see a substantial number of adverts in the IT recruitment press for vendor managers,’ says Kyte.
‘As CIOs learn about the dependence on suppliers and realise that the traditional approaches to IT procurement are not yielding value, they will make that transition.’
But simply creating IT relationship manager positions is not enough. If there is a culture of vendor bashing, some rigorous change management will be needed.
‘It starts from the top and works down,’ says Kalisperas. ‘Culture must change at all levels. Everyone on the customer side who has a failing relationship with a supplier needs to understand the principles that underpin a good contracting relationship.’
Kalisperas would like to see changes on both sides. For suppliers, moving away from over promising and under delivering, and for customers, moving away from seeing suppliers as being in it just for the money.
‘You need to lay down the principles that underpin good practice and try to embed them throughout the organisation,’ he says.
The transformed CIO
How much time do CIOs spend with suppliers on issues other than problem resolution? Most untransformed CIOs only really concern themselves with suppliers at the point of a deal or when things are becoming bad and they are involved in problem resolution, says Kyte. The transformed CIOs schedule and dedicate time to ensure they keep abreast of the relationship.
‘Typically, in those organisations, we will see the vendor managers reporting directly to the CIO,’ says Kyte. ‘After all, if a CIO is spending £200m with a vendor, it would make sense for the manager of that vendor to report directly to the CIO.’
Transformed CIOs have realised that a collaborative relationship helps gain more from suppliers without spending more money. It allows them to be more effective in supporting the business. ‘We find the CIOs who do understand this are keen to keep it under wraps,’ says Kyte.
Further reading:
Best practice - managing supplier relationships
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