Competence at managing trading relationships is the key issue
Proxima, a consultancy and outsource service provider, recently published a report “A global study of cost externalization and its implications on profitability”; or put more simply, ‘how much do organizations spend with external suppliers and how should we manage them better?’
According to the report, some 7o% of an organization’s revenues today flow to its external suppliers. To those who ever studied the writing of Ronald Coase (see my blog from last week), this should come as no surprise. Coase’s work demonstrated the point that operational cost is the main determinant of ‘make or buy’ decisions – and network technologies, coupled with their falling cost, therefore makes the move to outsourced supply inevitable. Indeed, I was a bit surprised that the Proxima report suggests that the growth of external spend to this level is ‘new news’.
For most executives, the big question remains ‘What must I retain as an internal competency? What capabilities represent competitive advantage?’ One area that will never disappear is commercial judgment – the ability to make the right decisions at the right time. It is a topic on which we observe growing focus. And another, quite obviously, is the ability to select, structure and manage the right trading relationships.
In this regard, I depart from the views expressed in the Proxima paper, because they express this business challenge in narrow terms of ‘procurement’. What all those engaged in the promotion of supply management appear to miss is the fact that procurement only matters if you sell things (I appreciate the position is a little different in public sector, though even there, procurement only matters to the extent that services remain relevant and affordable). For corporations, the pressing issue is how to drive better integration between their trading relationships. The 2011 IBM CEO study expressed this as a need to better understand and manage ‘interdependencies and interrelationships’.
I strongly believe that organizations must develop a more integrated capability in their management of trading relationships. Increasingly, they must also understand and oversee how those relationships interact with each other. The fragmentation between buy side and sell side activity, the inability to manage interdependencies in the supply network, the absence of consistent management of the same customer or supplier in different parts of the business …. these remain fundamental issues for many organizations and generate substantial value-leakage.
Establishing coherence demands an integrated contracting process in which business goals are reflected in selecting the right suppliers and market opportunities. Selection will increasingly be based on criteria such as culture, ability to perform, value delivery and management of risk. Greater rigor in selection and performance management enables far more collaboration in the overall relationship.