SMI 01 | Managing Contractors

Managing the Relationship with the Supplier Professionally

The success of a business model depends on an array of factors. In many cases, efficient cooperation with service providers is crucial. However, in practice the opportunity to harness the potential of the strategic management of service partners is often missed. An INVERTO survey on the current situation in European companies identified a number of key challenges, success factors, and initiatives.

From selecting appropriate partners and clearly defining the required services, through to ensuring needs-based implementation, procurement teams can and must make the relationship profitable. Service provider management often only focusses on short-term savings, rather than an increase in performance efficiency.

To obtain the optimal economic configuration of service relationships, the survey of service providers and buyers confirmed the need for action: 77% of the surveyed service providers criticised awarding contracts without strategically coordinating common interests. Tendering processes are often perceived as more formal and less content-based. The discussion of alternative service concepts is often too short, for example. According to the service providers surveyed, this resulted in part from limited knowledge of the services actually required. For a long-term supplier relationship, a holistic view of the processes and roles of the parties is required.

Typical Weaknesses from Service Providers Viewpoint

77% Transactional, not strategic (Customers concentrate on individual tenders instead of long-term contracts with service providers)
68% Concessions instead of solutions (Customers expect financial concessions instead of constructive contributions to problem solving)
64% Specification goes beyond due diligence (Customers adhere to quantitative specifications, while quality and risks are given too little attention)
59% Lack of knowledge (Customers often do not have experienced staff; a deep understanding of services is missing)
45% Ineffecient management decisions (Management requirements overcomplicate the process and are often not effective; lack of involvement of decision-makers)

In order to achieve successful cooperation, procurement should take the following four factors into consideration:

Strategic supplier relation

Procurement should take the opportunity to actively shape the selection and cross-functionality of service provider management, and promote targeted improvements and innovations with selected service providers. In this scenario, procurement is specifically responsible for professional and targeted planning and implementation of the tendering processes. This is also dependent on content-related cooperation with the relevant department. As a further part of the process, procurement takes on the role of facilitator, harnessing its commercial knowledge, and the department must ensure that the cooperation runs professionally.

Procurement can quickly arrange a structured tendering process for a supplier competition and a favorable price. Procurement should not, however, leave finding the best price in the hands of the market. For long-term price optimization and economies of scale within the service sector, requirements must be analysed in detail and bundled over the long term.In addition, procurement must ensure that future partners can deliver the desired high-level performance in the long term. Realistic costs must therefore be set out in negotiations. If a service provider gives an unprofitable price, unrealistic deadlines or an order volume above their capacity, out of fear of losing the order, the consequences of the negotiation play out all the more negatively in terms of negative commercial implications and delays. The service provider may find reasons why customers themselves are responsible for the delay and additional costs, and make additional demands, or their performance just does not meet the requirement.

Tailor-made qualification

The first step is a qualification procedure in which the focus should clearly be on testing the performance and compatibility of the service provider. In many companies, this administrative process is very complex and inefficient. In a lot of cases, pre-qualification is merely a paper exercise that takes up a lot of resources on both sides, but often has little relevance to the rest of the process. A procedure that is tailored to each service is therefore mutually beneficial.

The qualification process should enable real, cross-functional understanding of the performance of potential contractors and how compatible they are with the relevant company.

Systematic development of qualified partners can also form part of the tendering process. Initially awarding small projects to multiple suppliers can help you to make a better assessment of each supplier’s performance. Tenders can then be invited for larger projects from the existing pool of suppliers, in a structured way. This practice is useful when the works require the supplier to have detailed knowledge of customer processes.

Proactive risk management

Both parties must pull together to implement efficient risk management. Defining KPIs and incentives creates a common understanding of the relevant risks. At the same time, active partner management is necessary to achieve real improvement in terms of these targets. Procurement should assume responsibility for interlinking all internal and external parties and providing contractors with a competent point of contact.

Continuous optimisation and innovation

We should not underestimate the optimization potential of a long-term partner. Service providers are often closely involved in their customers’ business, so they can gain detailed insights. This puts them in a position to assist customers in improving their processes and making a valuable contribution to the continuous improvement process. A common innovation program that directly involves the service provider in processes can be a very effective tool for systematically collecting optimization approaches, identifying risks, and prioritizing and implementing measures. Especially in times of skill shortages, a qualified service provider can also reveal internal weaknesses in terms of knowledge transfer: new colleagues meet up with established partners, and may find that there is more valuable knowledge held by these contractors than exists in their own companies. So, it is important to establish internal skills at an early stage and to ensure a seamless transfer of knowledge. Cross-functional teams or interdisciplinary trainee programs can provide the continuity needed. Established partners can help here too by providing their internal teams with an in-depth insight into their services and sharing their specialist knowledge.

In addition to well-defined, multi-site types of services, location-based services can also be optimized using a standardized approach. During the acquisition process, it is not advisable to start from scratch every time. This is because the most effective performance is possible when contractors are familiar with the customers’ organization and their needs. Larger and particularly routine “order packages” not only streamline acquisition and onboarding, but also motivate the service provider and expand subject and customer expertise. For long-term partners, confidence in sustainable business volume should never be undermined by short-term changes in order and price negotiations.

CONCLUSION

The basis for a satisfactory, long-term partnership for both sides is clear communication. Only then can expectations regarding optimizing purchased services be met and opportunities taken to develop business processes to their mutual benefit. Managers must be aware that this is a complex and challenging pathway that is best supported by a cross-functional road map. The cross functional road map at the highest level is as essential as actively involving all required functions and business units.

Successful Design of Service Relationships

Concrete steps in the design