Partner: GCS
For many companies, the Covid-19 Pandemic highlighted the delicate balance of the relationships that they have with their suppliers. This was tested at numerous points during the Pandemic as the supply chain crisis increased and made the development and provision of products significantly more challenging.
As many companies look towards moving on from the crisis, the natural starting point is to look at the development of relationships that will enhance the company and its operating models. This has led to many companies sitting down with their suppliers plotting the way forward. I recently read an article by the Harvard Business Review which provides fresh insight into this. Rebuilding trust is the corner stone of this process.
A Method for Measuring Trust
The HBR article points out that trust is a fuzzy thing. How do you measure the level of trust in relationships? This question led the authors of the HBR article to develop an assessment tool, which measures the health of the trading partner relationship and helps the two parties understand how their actions and behaviors may inhibit trust in the relationship.
As part of our research, we performed 129 assessments across 98 unique trading partner relationships in more than two dozen industries. On average, the assessments were done 1.7 years into the trading partners’ existing contract and had an average annual contract value of $94 million. In many cases, the trading partners had been working under previous contracts and were looking to create more strategic relationships requiring a higher degree of trust. Fifteen of the relationships allowed us to do follow-up assessments, which gave us valuable insights into how to turn a low-trust relationship into a high-performing partnership.
The tool that the authors of the HBR article use for assessing partners’ compatibility and trust (C&T) measures five key relational components that contribute to a healthy and trusting relationship.
- Focus is the ability to combine individual roles into a corporate direction to benefit all stakeholders. There is a common purpose and direction and clarity around that direction.
- Communication is the efficient and effective transfer of meaning through words and actions to achieve and grow mutually beneficial outcomes. It includes open and timely sharing of information that a partner needs to make decisions.
- Team orientation is the ability to focus and direct individual goals and objectives into a cohesive group strategy. Team orientation is a key indicator of how well trading partners work together.
- Innovation is an organization’s ability to dynamically deal with change and its tolerance for risk and trying out new ideas and solutions. Strong and trusting relationships allow the parties to share risks and rewards, invest in each other’s capabilities, and collaborate to achieve common goals.
- Performance trust is the consistency in performing as promised — i.e., meeting commitments.
For each component, the buyers and suppliers score both their view of themselves and their perception of their partner. A key goal is to identify gaps that highlight areas contributing to misalignment and distrust. Once the gaps are identified, the trading partners can begin the work of closing the gaps.
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Trust with suppliers starts with cultural fit
The HBR article points out that, in the authors research for Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships, a book two of us (Kate and Karl) coauthored with Jeanne Kling, executives at Procter & Gamble attributed cultural fit with suppliers as a critical success factor. Cultural fit in a trading partner relationship can be summed up as having similar perspectives on how organizations work, communicate, and make decisions. Our C&T assessment method allows business partners to gauge their cultural fit across the five dimensions.
One example of a cultural fit mismatch we came across concerned a medical device company and a supplier to which it had outsourced facilities management. The medical device company’s operating culture valued flexibility and innovation while the supplier’s culture was hierarchical and process oriented. Realizing this, the parties amicably agreed the supplier would not participate in an upcoming competitive bid process. The parties also agreed on a fair way to compensate the supplier for helping support a smooth transition to the next supplier.
Your business model matters to suppliers
The article points out that, when organizations procure goods and services, they have a choice of sourcing business models, ranging from highly transactional (buying goods with a simple purchase order) to highly strategic contracts based on achieving ambitious business outcomes such as increasing speed to market and innovating to meet the United Nation’s Sustainable Development Goals (SDGs) for responsible production.
Research using C&T assessments shows that an organization’s choice of sourcing business model can have a positive impact on trust. Take a pharmaceutical company that had outsourced its facilities management to a supplier for almost 25 years. In 2015 the parties were operating under a performance-based sourcing business model, which puts risk on the supplier to guarantee cost savings and performance levels. While savings and performance targets were being met, the pharmaceutical company was irritated with the supplier’s lack of innovation. Likewise, the supplier was frustrated because its profits suffered every time it performed work outside the scope of the contract. Here C&T assessment revealed the parties had a good cultural fit but the contract itself was pitting the parties against each other in a classic win-lose situation.
The article adds that in 2017 they decided to try a new approach to contracting that used a vested sourcing model, which combines a formal relational contract with an outcome-based economic model. (It’s called “vested” because the parties have a vested interest in each other’s success.) Now the parties share risk and reward for delivering mutually defined desired outcomes. The results are significant after the parties changed their business model — both in terms of results and increased trust. The supplier delivered 48 transformation initiatives and nearly 250 standardization projects, resulting in double-digit cost savings and earning incentives that yielded higher profits. Trust also increased, rising 22% by 2019. Their relationship health continues to climb and by 2021 had risen by 35%.
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Increasing trust is a strategic choice
Can you take a broken and distrustful business relationship and turn it into a healthy relationship? Or can you take a good relationship and make it great by increasing trust? The article points out that the answer to both is a resounding yes. But doing so doesn’t just happen; it is a strategic choice supported by conscious behavioral changes.
In all the organizations we studied the need for change served as a catalyst for improving relationship health. The C&T assessment helps trading partners take the vague concept of trust and provides a quantitative measurement of their relationship health. Equally important, the assessment highlights gaps where not-so-trustful behaviors are creating friction.
Such was the case for Vancouver Island Health Authority and South Island Health, a group of doctors who were operating under a labor services agreement for providing hospitalist services to the authority. When a lack of trust stalled contract negotiations, the parties turned to a neutral review of their relationship that included using an assessment. It provided tangible guidance on what was causing their trust issues and helped the parties realize they both wanted a better fit.
The article adds that They made a conscious choice to turn their troubled relationship into a trusting and collaborative relationship. Their efforts led to an increase in their C&T Index from .48 to .71 in just two years. Along with increased trust came increased business results such as achieving cost-containment goals and developing innovative solutions such as the Hospitalist-at-Home program.
A close relationship yields results
As with all relationships. The closer you are to the other party, the more common ground you find with them.
This is imperative in the current business environment where disruption has lead to uncertainty which is a significant detractor of value. Now, more than ever, companies need to make a concerted effort to sit with their suppliers and build trust based relationships so that common value can be found. This will be replicated in the value provided to shareholders and stakeholders.
This will also allow companies to possibly begin the process of addressing their financial distress or turning their company around to address any operational challenges.
It’s a value based exercise for all and suppliers are key.
Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner.
