The concept of the relational contract is not new, and we’ve discussed relational Vs. transactional contracts in this article and their benefits in building healthier supplier relationships.
But the challenge isn’t merely recognising the concept exists, moreover it’s how to implement it in the real world when counterintuitively it can feel unnatural. We’ve recently been working with customers that are amidst their digital transformation and realising the power of data and performance to drive relationships – not the contract.
In this article, we discuss how data can help the evolutionary process from contract focus and scouring T&Cs to dish out punitive punishment to supplier relationships that are relationship-focused and mutually beneficial.
Avoiding the Asymmetric
Where better to start than with the Nobel Prize Laureate in Economic Sciences, Oliver Hart who focuses on the theory of asymmetric information and contracts?
If this all sounds a little heavy and academic, it needn’t be. Every supplier relationship has certain elements of asymmetry, i.e. having parts or aspects that are not equal or equivalent. The trick here is to recognise and realise these power imbalances that are baked into the supply chain relationship and not be tempted into unnecessarily pressuring them to reduce prices if you have the upper hand, or for them to increase prices should they have the ability to.
The power of data in this balancing act is paramount. If you can seek to work together to recognise the factors at play commercially in a collaborative manner through discussion of the data, the whole relationship becomes collaborative, agile, resilient and transparent.
An example could be that your company represents a large percentage of the suppliers’ business and that therefore has an impact on their resilience. They could well be an essential or strategic supplier, but in a crowded market – so discussions using the data from buying events and historical operational performance could be used proactively to get everyone on the same page so that everyone wins. This means that your firm could change the supplier quickly to save a few pounds here and there, but if performance is excellent, the downstream cost of this could be large and risky.
In the inverse, you could be reliant on a supplier for a large percentage of a particular component. Firstly, the power of data illuminates this fact. If you don’t know the definitive truth, you can’t manage the relationship appropriately. In this case, the way you work would be different in terms of the relationship management practice and processes.
This can also be the case for ESG-style objectives, where strategic suppliers may not tick the boxes required. However, you’re driven to help them achieve the KPIs on your behalf rather than re-assessing the supply chain and putting pressure on operationally and commercially beneficial relationships.
Principles, Not Point Scoring
We’re not advocating that there is no legally enforceable written and formal contract, but the contents of the contract are balanced and weighted with relational commitments and not specific, commercial or operational service level agreement-style points of the “deal.”
Again to reference the Nobel Laureate Oliver Hart, this is the foundation for “shading” behaviour, where there is a grievance under the surface where expectations aren’t being met, and proactivity and cooperation suffer greatly.
In this instance, performance data and regular reviews in a simple platform and process are key to unlocking the conversations that need to happen without emotion and anecdote.
Three failed deliveries in a week seems like a nightmare, but things do happen, humans can be unreliable and vans can fail… and three of 200 this week isn’t a huge percentage. However, if there is data to back up the conversation and discuss this 1.5% failure rate, then zoom out on the overall month, year or contract view – the 1.5% may become much less.
This is where a relational contract comes in, it’s more focused on guiding principles and not point scoring, which only adds to the asymmetric relationship where one company feels as if they are on the back foot.
A relational contract is based more on how the company works through the challenges that present themselves and a commitment to honesty, transparency and equity along social norms makes sure to avoid short-term opportunism. If this is all backed up with data, then it diffuses the difficulties massively.
Data in the Driving Seat
With data in the driving seat of your supplier relationships and not just working to the contract, your business can survive and thrive even in tough, disruptive markets. A fair and flexible approach that is balanced between pragmatism and performance data means that problem solving should be much faster, more predictive and proactive too.
We’d love to speak to you about how we’re working specifically with some of our customers to help them re-assess their supply chains, and analyse and make insight-driven decisions on their supplier relationships – all powered by data.
Get in touch with one of our team today and let us help you move away from the asymmetric power struggle and into a more collaborative relational approach that works for everyone.