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The Challenge Of Being Too Responsible

August 8, 2010

The media is full of threats by business to uproot and move from highly regulated countries. Banks and financial institutions are among the most vocal, but a story in Forbes illustrates that the issue affects other industries, in this instance medical devices and pharmaceuticals.

Of course, at one level we all know there is a lot of sabre-rattling when new legislation is proposed and many of these threats are simply posturing. But there is little doubt that highly regulated environments damage international competitiveness over time, because they discourage investment and push innovation off-shore (a point highlighted by the Forbes report).  Too many rules cause longer cycle times, added complexity and increased costs of doing business. Too few rules produce risks to social or individual well-being. It is a tough balance for governments to strike, especially when competitor nations are always ready to take advantage of whatever steps they take …

In the end, businesses face the same dilemma as they decide how best to form and manage their trading relationships. Too much ‘due diligence’ makes them unattractive to do business with, but too little is risky. How do we find a balance?

Part of the answer may be a need to pre-qualify potential customers and suppliers, to ‘segment’ relationships on their relative desirability. That sounds a daunting task, especially in today’s global markets. But in fact there is data emerging from a multitude of sources and it should be used by smart procurement and contracts groups to assist faster determination of relative risk and required contract terms and strategies – for customers or suppliers.

An example comes from another article in Forbes, which highlights a list of ‘most trusted’ companies. These are organizations that history suggests really do care about their reputation and take real steps to ensure they do the right thing. Perhaps they represent an ‘A-;list’ of potential customers and suppliers.  Governance Metrics International has developed a database of more than 4,000 companies for which it has ascribed a ‘corporate governance’ score (you can view the top 20 here). There are many more examples of organizations developing tools and databases that will assist in assesing the likely reliability (or relative risk) of suppliers (Ariba, Beroe, Alliantist are just some examples of these providers). Audit Integrity has produced an analysis of the ‘most trustworthy companies’.

Unreliable suppliers and customers cause many hidden costs. But often, the pressures to make decisions and get deals signed (or to judge on narrow parameters such as cheapest supply) lead us to pick the wrong trading partners, or to under-estimate the hiddent costs of doing business with them. We discover this only through experience. Increasingly, sophisticated organizations will become more proactive in managing risk, by assembling market knowledge and criteria that helps them understand (and justify) which organizations are worth a premium price, or an extra discount, to ensure their business – and which organizations should be charged a premium or avoided altogether.

We all understand the principle of using insurance to cover risks. We recognize that insurance demands payment of a premium. Selecting the best and most responsible customers and suppliers will also demand a premium – but it is a price increasingly worth paying.

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