Five Rules How CEOs Can Redefine Winning with Strategic Suppliers
The University of Tennessee set out to research some of the world’s most successful strategic partnerships—including those at P&G, McDonald’s and Microsoft—to see how and why these relationships added value. The research identified five principles that CEOs everywhere can use to transform supplier relationships.
April 6 2014 by Kate Vitasek
What UT researchers coined a “Vested” sourcing business model, is based on five rules or tenets designed to spur hyper collaboration and drive innovation:
Focus on outcome-based, rather than transaction-based models;
Focus on the what, not the how;
Have clearly defined and measurable desired outcomes;
Pricing models with incentives that optimize the business; and
A governance structure with insight rather than oversight.
The UT research is far beyond the theoretical: there is clear evidence that this approach works. Let’s explore the real results from the Procter & Gamble/Jones Lang LaSalle and Dell/GENCO.
P&G has always been thirsty for innovation. It’s no wonder the company is a leader in understanding the potential power a supplier can bring to drive innovation in an area where P&G does not have a core competency, such as facilities and real estate management. In 2003, P&G decided to develop a highly strategic outsourcing relationship with Jones Lang LaSalle (JLL). The premise? The companies created a commercial agreement that flipped the conventional outsourcing approach on its head by contracting for transformation instead of contracting for day-to-day work.
Rather than reward JLL for simply showing up to perform tasks such as janitorial and maintenance operations, P&G tied JLL’s profitability to the latter’s ability to drive success against jointly defined business outcomes. Simply put, the more successful P&G would be, the more success for JLL.
Winning together is key. The highly strategic partnership has consistently delivered results for 10 plus years – with JLL winning P&G’s supplier of the year award three of the last 10 years out of P&G’s 80,000 suppliers and helping P&G increase service levels by 17 points, significantly reducing P&G’s cost structure, and increasing the capacity to innovate. Earlier this year the duo received the International Association of Outsourcing Professionals’ 2014 Global Excellence in Outsourcing Award for Innovation, known as the GEO Award, for driving innovation in outsourcing.
Dell and GENCO began their relationship in 2005 when Dell selected GENCO as a supplier to help expedite Dell’s return and repair process. GENCO performed well and in 2009 the relationship scope expanded when GENCO acquired Dell’s buildings, assets, and people under a three-year outsourcing contract.
While they would say it was a strategic relationship, the commercial structure of their agreement was far from strategic. The deal itself was a typical transaction-based contract in which GENCO assumed the risk of meeting a set “price per activity” while maintaining service levels. The agreement worked reasonably well for a time, but Dell’s leaders continued to face cost pressures and they insisted on an “every dollar, every year” procurement principle—even though under the contract GENCO assumed much of the risk at the “set price” contract terms.
From Dell’s perspective, GENCO’s cost reduction commitments were no longer good enough to provide Dell a competitive advantage in the marketplace. From GENCO’s perspective, they had squeezed all of the cost reductions they could given the “box” they were in. Neither party was happy, and there was wedge in their trust level.
Dell set out on a journey to explore how a Vested approach could work with GENCO and eventually restructured the agreement. The result? Not just asserting GENCO is a strategic supplier, but structuring a strategic commercial agreement with true win-win economics.
It was a huge success for Dell’s Global Outlet—reducing its cost structure by 32 percent, increasing revenues to record highs, and becoming more environmentally sustainable by reducing the scrap level of old and damaged hardware by 62 percent. GENCO also benefited with a tripling of its margins.
John Coleman, GENCO’s general manager points to the Vested approach as a key reason that enabled GENCO to drive innovation for Dell. “It gave us the freedom to get creative. It’s like we broke open a new innovation piñata. GENCO employees now know that we will share in the reward for good ideas. Now, every quarter we make new priorities that align with our defined mutual outcomes.”
Dell’s procurement group calls the rules “radical common sense” that had somehow escaped the “best practice” in procurement methods. Why? The tenets provide an alternative to the relentlessly competitive “I-win-you-lose” mindset by creating commercial structure designed to foster a culture of cooperation, trust and innovation. The buyer and supplier become Vested in each other’s success.
Kate Vitasek is a on the faculty for the Center for Executive Education at the University of Tennessee and founder of Supply Chain Visions, a consulting firm. Her applied research and thinking have been published in over 200 articles in academic and trade journals, as well as in five books (The Vested Way: Why a What’s in it for WE Approach is THE Framework 21st Century Business Relationships are Built On.) She is also co-author of the Council of Supply Chain Management Professionals’ Supply Chain Management Process Standards. Vitasek has been selected by World Trade Magazine as one of the “Fabulous 50+1” most influential people impacting global commerce.