The Sourcing Chicken Game

Today's blog on negotiations for sourcing transactions comes from Peter Allen, Director & Managing Partner, TPI.

Businesses play the game of chicken for many sourcing transactions, and that is not good for either party.

A recent survey by the well respected International Association for Contract & Commercial Management (IACCM) indicates that negotiations are dominated by quarrels over short-term considerations. Battles revolve around short-term costs, risk allocation and self-protection, driven by the continued perception of adversarial roles between buyers and providers of outsourced services.

Recently, IACCM published an excellent and timely compendium of contractual terms commonly encountered as points of contention in trading relationships. It includes those specific to sourcing contracts and is a good starting point for examining unfulfilled expectations.

Client frustration usually stems from lack of innovation, and the recessionary climate isn’t helping. But some behaviors border on desperation with excessive focus on near-term benefits and little balance in risk-sharing. Data privacy and business resiliency are being held up as poster children for make-or-break deals. Those are valid business issues, but the risks cannot be contracted away to a service provider.

Ultimately, what’s resulting is a dangerous tone among both parties.

The lessons of successful sourcing are clear: It’s the relationship that makes the difference, not a prescriptive contract.  Transfer of accountability is virtually impossible to achieve, and companies need to stop trying to guarantee in the contract what should be managed through effective governance.

Having the pit bulls of negotiations setting the tone for eventual delivery of service will only lead to diminishing returns. Instead, partnership-centric negotiations will set the stage for the service providers to manage the risks, achieve profitable performance and meet mutual expectations.

Tim Cummins, the IACCM CEO, writes that “a growing band of CEOs has highlighted the importance of trust as a key underpin to the development of the global networked economy.”  This attitude needs to filter into the sourcing strategies and negotiating tactics of firms, and it depends on adopting a culture of governance. Respecting the value of a relationship frames a contract, which at the very least, meets those growing expectations. 

Comments

[Bill Budde]

This game of "chicken" is often the case when the parties are gaming from a "zero sum" basis. As those who know and have engaged in longer term relationships, there is the need for understanding of the goals and boundaries for each party to be successful in the relationship. Change is a constant in business, and seems to be accelerating with globalization and integration of multiple suppliers to the supply chain. The dilemna is that both parties must develop a deeper understand of the other's definition of "success" to avoid abrupt changes in the relationship, and to maintain accountability.

[Peter Allen]

Bill;

You point out a fact that, sadly, is not self-evident to enough executives. It is often the case that the contracting for Services (long-term agreements to perform technology-enabled, people-intensive work processes) is handled by individuals better suited for buying commodity items. There's a real art to building a relationship that will stand the test of time during the 'mating dance' of an outsourcing evaluation and negotiation.

The best way we've found to shine a bright light on this urgency is to evaluate a candidate relationship through three simultaneous and inter-related lenses: Costs, Capabilities and Capacities.

Only then will true alignment of interests, expectations and necessities be made clear.