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Do unreasonable terms drive innovation?

October 17, 2018

Suppliers understandably complain about the unreasonable terms and narrow evaluation methods used by some of their customers. They are often right to point at the failures that result from such behavior, when it results in incompetent and sometimes dishonest suppliers winning business that they have no chance of performing, or the burden of risk promotes an adversarial relationship.

Selections based on the lowest price are an obvious culprit here, but it goes further. The tendency for buyers to burden suppliers with unmanageable or unquantifiable risk is another major issue. For example, demands for the right to terminate ‘for convenience’ and without compensation are increasingly on the table, as is the expectation that suppliers should bear the geopolitical risks associated with major projects. 

Clearly, demands such as these cannot be countenanced by ethical providers who a) want to honor their commitments and b) have a duty of care to their employees and shareholders. Acquiescing to contract terms that could put them out of business is not compatible with good governance. In many cases, buyers back down because they recognize that their demands are not viable. Sometimes they – and their advisers – were simply pushing for an extreme, to see what they could get.

But I think there is a more interesting question here and that is ‘to what extent is unreasonableness the driver of innovation?’

Innovation depends on dissatisfaction with the status quo, a belief that things could be improved. If buyers never set aspirational targets, the incentive for suppliers to raise their game would reduce. So is ‘unreasonableness’ actually a critical element in our progress towards delivering continuous improvement?

To take a brief example, constant demand for reduced prices is on one level unreasonable. Yet it also forces a response from suppliers who wish to stay in business. That response is typically achieved by cutting their costs; sometimes it is via adding value; and on other occasions it could be through commercial innovations, such as ‘as-a-service’ contracting. There is always the risk that lower prices are achieved through unethical or undesirable practices, such as child labor or unsafe working conditions, but overall they have enabled many lives to improve and provided access to previously unaffordable goods and services.

Overall, there can be little doubt that ‘unreasonableness’ is the mother of invention. Many of the risks that suppliers typically accept today would have been unthinkable in the past. So perhaps we need to stop viewing risk as something that is negative and see it only in the context of an opportunity to do things better.

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