Sales Trend 7 from the Barrett 12 Sales Trends for 2016 Report is ‘Buyer Behaviours in Transition’.
For some time now we have seen many suppliers falling victim to the ‘race to the bottom’ mentality and tactics driven by various businesses and their procurement teams, especially from the oligopolies that exist here in Australia and the large international corporates.
As highlighted in 2015, our Sales Trend 1 was ‘Race to the Bottom’ which showed the culmination of the disastrous effects of such short term thinking and tactics on business success, innovation and profitability. While this 2015 sales trend will linger for some time, common sense seems to be prevailing with an alternative trend emerging from the chaos and bloodshed of the race to the bottom tactics.
By way of background to this trend it helps to look at where Procurement has come from and what is driving their tactics, behaviours and actions. Since the early 1990s, the primary function of Procurement Teams has been to extract cost savings from bought-in goods and services. But as we are finding there is a limit to the number of times buyers can sip at the well of unit price reduction which is demonstrated in another one of our 2016 sales trends – Beyond Profit Erosion. This reductionist approach to ‘single unit’ pricing takes things too far and falls into the point solution or silver bullet category as is doomed to fail.
This Sales Trend sees Buyers in Transition and highlights that more mature procurement professionals, who have been through the sourcing cycle several times, are now starting to seek new ways in which they can be relevant and valuable to their organisations. They are seeking innovation, ideas, collaborations because they have seen that taking prices lower would be detrimental to their business. It’s early days but things are starting to shift, albeit slowly.
Specifically, the more mature and enlightened procurement teams are looking to derive advantage from the unique insights of their supplier base. They are becoming conscious of the potential for the external participants in their supply chains to deliver innovation, both as continuous improvement to operational processes and as new-stream value.
Supplier Relationship Management (“SRM”) is becoming the focus activity for more enlightened procurement functions and teams.
What is SRM?
Supplier Relationship Management – SRM requires buyers to broaden their endeavour from negotiating the initial commercial transaction to establish a beneficial relationship with key suppliers / providers for the duration of the supply arrangement.
Until recently, research into how this can be achieved has been overwhelmingly buyer-centric and supplier perspectives have largely been ignored or limited to the “Voice of Supplier” interactions with a single sponsoring buyer. Preliminary Supplier Relationship Management research, currently being conducted by Catherine Thompson and Rebecca Varley, is highlighting that healthy buyer – supplier relationships have more than one side and by establishing an open and transparent dialogue with suppliers and highlighting shared values, experiences, ideas and strategies better, healthier and more sustainable relationships can be forged with buyers.
However, there is still some way to go to achieving healthy buyer-supplier relationships
Some of the hurdles or road blocks that still exist include:
- Ethics of Buyers in question: Preliminary findings from the Supplier Relationship Management research shows that over 50% of the suppliers surveyed in the past 12 months had encountered buyer behaviours they classified as unethical. Most commonly cited were re-negotiations of contracted arrangements to reduce pricing and to push out payment terms. These practices have received extensive publicity recently in relation to the supermarket giants, and we are aware that they are also prevalent in the stressed resources sector. Suppliers also reported that buyers inflated volumes on which they relied for pricing, and expressed concerns about the probity of tendering processes.
NB: What is very interesting is that a large majority of suppliers who identified unethical buyer behaviours had taken no action to correct them. Their main concerned was the ramifications on their revenue streams, and potential repercussions from the buyer, such that the supplier who just “reduced the price to keep the client” was representative of the population. Many cited the importance of the customer’s revenues as the reason for their inaction.
- Ramifications of Contractual Frameworks on Supplier Relationships: The research also highlighted that much of the behavioural potential in the buyer/supplier relationship is crystallised at the formation of the contractual relationship, and this is where imbalances of power for relationship-building manifests. The reasons for the suppliers’ concerns were that the contract terms typically, and unsurprisingly, favoured the buyer’s position and shifted risk to the supplier. This is perfectly rational behaviour from a buyer looking to maximise the upfront value of a deal. However, from an SRM perspective, a relationship whose formal construct is not equitable, mutual, or balanced will find it more challenging to cultivate the trust and encourage the discretionary effort which may lead to enhanced long-term supplier contribution.
- Contractual frameworks adversely affecting innovation: Most standard levels of performance (SLAs – service level agreements) in supply relationships centre around pricing, quality and delivery expectations, with penalties for failure to perform to the agreed standard or other negative incentives such as termination. However, even though many SRM contracts may state that buying organisations value innovation, the majority of suppliers do not believe that buyers valued innovation given their current behaviours. The focus on meeting standards and the consequences of failure led one supplier to observe, representatively: ““all the incentives are penalties so focus is shifted to ensure we DON’T miss our SLAs rather than how to increase service levels”. This leads to an inevitable observation: that it may not be a realistic aim to tap into the innovation potential of suppliers from a relationship contractually structured to address dispute and non-performance. When asked for insights into their most positive buyer-supplier relationships, 70% of suppliers stated that these buyers focused on deploying measures such as ROI, market share, profitability and time to market, all of which implied a greater willingness to share internal data – some of which is considered corporate-in-confidence – and a more collaborative mindset.
- Suppliers need to lift their game, too: The SRM research found that too many suppliers entered into unsustainable or unprofitable transactions over the preceding 12 months. Around 50% of these decisions were to lock out a competitor. However, the remainder were evenly split between entering a new market sector and offering lead-in pricing to customers with the hope of more profitable future business. Given the nature of contractual relationships that we have already explored, this latter strategy is a potentially risky one. Suppliers’ salespeople were also failing to maximise their face-time opportunities with buyers by not enforcing contractually agreed periodic review meetings that could potentially provide both business intelligence and a platform for their products and ideas.
The way forward: The Enterprise Impact of Better Business Relationships between Buyers and Suppliers
There is a rich upside in creating customer-of-choice status with buyers. Suppliers felt confident that they could positively impact a wide variety of measures within the buyer’s business if they were given the opportunity to do so. There is a desire from suppliers to be able to understand the real business priorities, issues, opportunities and strategy of their buyers moving forward. However, to date the SRM research shows that only 15% supplier respondents are using alternative contracting methodologies (such as Vested or outcome based) that seek to identify common ground and purpose and provide a more collaborative counterpoint to traditional contracting.
The remainder were evenly split between the curious and those who felt these frameworks had no place in their industry. There is huge potential here for supplier-led innovation to create a new contracting environment with suppliers.
The primary catalyst for change, voiced by one supplier and echoed by others was “a paradigm shift in attitude of buyers and suppliers”, by which they meant that buyer(s) need to demonstrate a greater willingness to engage in dialogue and to listen to supplier perspectives and the suppliers need to take time to understand the buyer’s business better and then provide actionable insights to improve the buyer’s operating environment. Acknowledging that corporate resources are finite, it may still be to a buyers’ advantage to solicit the views of both large and smaller, more nimble providers in targeted projects such as re-engineering efforts.
The SRM research revealed the Top 3 ingredients for a successful relationship. Trust topped the list, followed by open communication. Third was context, as the foundation for interpretation and helpful intervention.
This is a very simple, intuitive and almost obvious success recipe.
The challenge for building better business relationships is not identifying what a good relationship looks like. It is finding the way for both buyer and seller to create such a relationship from the beginning and that is able to remain a good relationship for both parties through time.
Remember everybody lives by selling something.
Authors: Catherine Thompson and Sue Barrett