Relational Vs. Transactional Contracts: How to build healthier and more beneficial supplier relationships

We’ve all been in those contract negotiation meetings with suppliers on one side of the table and buyers on the other. There’s always an inevitable tension in the room as both parties seek to meet their needs and the conversation can quickly turn into a tit-for-tat trade-off of terms and conditions.

Of course, this isn’t anyone’s intention but it feels like it’s the way to “do business” with a bit of good cop/bad cop interplay that can actually undermine the relationship from the get-go. These meetings aren’t always Apprentice-esque fireworks or Dragon’s Den-style imbalanced power dynamics, but the fact remains that it doesn’t always feel like everyone came out as winners or at the very least managed to protect their risk.


So what’s the solution?

We’ve recognised the need for a more contemporary, collaborative approach to supplier relationship management (and have developed the software platform to help facilitate these conversations too.)

This relational style of contract and supplier management can offer significant advantages in negotiating complex supplier contracts, managing dependent relationships and driving down costs, increasing quality and fast-forwarding innovation. It also is a future-focused move towards a world where we use data to drive behaviour, not contracts.


Relationship Vs. Deal

A forward-thinking supply chain team understands the longer-term impacts of negotiating the right contracts. A short-term deal mentality can lead to resentment and inflexibility that the same team will probably have to manage from its inception.

The recognition that the huge multiplicity of factors in play and a pragmatic and cooperative approach to the early stages of supplier engagement mean that the relationship starts as it means to go on. This isn’t about striking the best deal and creating incredibly tight terms that “feel” safe and like a quick win – it’s the ability to foresee that these terms may have to be malleable as the situation changes. If the last couple of years of supply chain disruption has taught us anything, it’s that change is the only constant.

You don’t want every conversation in the future to be a carrot or stick, or a make or break based on a signed terms document that is restrictive, punitive or strategically damaging should either party sway slightly out of their lane.

It’s only natural

Purely from a human perspective, we’re geared to look for partnerships in trade and our personal lives that are mutually beneficial, so a relational approach to supplier management is in our very nature. Psychologically we strive for fairness, and honesty and relish equity and integrity.

On the flip side of this, we also believe in recognising unfair behaviour, assigning responsibility and admonishing “bad” behaviour. It’s built into us culturally in the justice system, so having a relational approach encourages transparency in knowing what the penalty is (and agreeing this is a fair consequence) for not adhering to the contractual terms.


Risk is managed

Having a transparent and collaborative supplier relationship management culture (preferably supported by a platform like SourceDogg) ensures that complex and dependent supplier partnerships can thrive and both parties can identify and invest their time to mitigate risks.

Suppliers must understand that their customer’s success is their success so embracing the fact that you’re in this together is essential to solving problems instead of instigating power battles by frantically sending passive-aggressive emails to each other.


The contract is just the start…

As we mentioned earlier, the buying event and contract award is just the start of the relationship and it’s often one of the least important factors for the collaboration proper.

It’s important to recognise that a supplier relationship management programme relies on continuous input and improvement, it is never complete.

The terms, mechanisms and processes must flow and change to keep both parties’ interests in alignment. It’s also incredibly important to start as you meant to go on and for either party to be seen as unfair, haughty, difficult or worse is just a status and power battle that no one really wants to be part of.


It’s all about trust

In difficult trading conditions for many, with cost increases, inflation, labour cost increases, supply chain disruptions and much more, supply chain teams are looking for better ways to implement dynamic yet formalised relational contracts. We believe this relational approach to contracts is the antidote to transaction-based deals that mirror normal social behaviour and helps mitigate risk over the long term.

If you’re looking for a better way to have this kind of transparent and collaborative partnership, we’d love to show you how SourceDogg’s supplier relationship management software platform helps you achieve exactly that. Get in touch today for a demo and see for yourself why leading supply chain teams across a huge array of industries are choosing to come on board.

Recommended Posts