Imagine you are reading the Sunday paper. You suddenly see your vendor’s company name in an article about its stock value plunging upon news it was experiencing “constraints” delivering its services. On August 10th, that very thing happened to the customers of Swift International (Swift). “Where Have All the Trucker’s Gone?” Sunday, Aug. 10, 2014, New York Times. Apparently, Swift (and presumably other logistics providers as well) can’t find enough qualified drivers to work for wages that have decreased up to 6 percent on an inflation-adjusted basis in the last decade. Those customers that had not already heard the news read about it in the paper. If you are a sourcing, contract or procurement professional, this type of news should cause you to pause and reconsider your vendor pool.
Some companies and their service providers may have gone too far in asking for and attempting to deliver savings. In some circumstances, savings have apparently come at the cost of performance. Swift is not the only service provider to face pressures to reduce costs and had performance challenges as a result; it is merely the company in the spotlight at the moment.
Traditionally, buying companies would seek to limit their risk exposure by diversifying their vendor pools. In the logistics industry, dedicated carriage- or fleet-leasing arrangements have been used to reduce both parties’ risk as well as reducing their costs in re-bidding. But if a lack of drivers, or any other kind of qualified personnel in your industry, means that a diverse pool of vendors will face the same challenge, it is time to do something different.
The answer lies in the method the buying and selling company uses to negotiate value. Most companies think using a collaborative negotiation approach should be reserved for the service providers who are already performing well. That’s a huge mistake.
Negotiating Value
In research, conversations and personal experience as a contracts attorney, buying companies have placed a lot of pressure on themselves and their vendor pool to deliver savings—in some cases guaranteed savings.
The problem with this pressure occurred in the bargaining process, not with the attempt to control costs. Both the buying company and the service provider spoke only of claiming their value (each attempting to capture as much margin as possible), rather than about ways in which to create and then allocate newly created value. The book, Getting to We, outlines three ways business people negotiate value. Negotiators can claim value (literally take the largest share of a limited resource), create and then claim value (expand the pie and then take the largest share of that pie – a limited resource) or they can create and allocate value for mutual gain.
Allocating Value is Not Claiming Value
This third method for negotiating value is literally a framework. Unlike conversations centered on claiming value, which are one-off events, the two companies are in effect structuring an approach to work together to solve problems associated with rising costs, disruptive innovations and pressures to reduce costs.
Allocating value may seem too good to be true: it is not. Allocating value is real and companies have done it. The article “Unlock Value By Decreasing Vendor Risk” describes how two companies successfully allocated value by decreasing risk. Establishing a financial framework instead of a one-time negotiation to fix the fee does require a significant shift in both companies’ mindsets.
Allocating value is premised on two pillars. First, both parties have a what’s–In-It-for-we attitude. This attitude is the philosophical mantra for all highly collaborative relationships, and for allocating value.
To truly deliver savings without sacrificing one company at the expense of the other, both companies need a we mindset that is the opposite of the mindset used by negotiators when claiming value for their company.
If you accept the we mindset, then you accept the reality that wages are going to rise at some point. Rather than shifting the burden to the vendor in a fixed-fee agreement, the parties would seek ways to absorb the rising wages and to reduce costs in other areas. For example, one of our clients had success in re-routing its drivers to consume less fuel, which offset other costs. In a value-claiming negotiation, the buyer may have chosen a traditional fixed rate or fee agreement believing that rising wages are not their problem – they are the vendor’s problem. It is an illusion that a fixed-rate or fee agreement will shift the risk to the vendor and all the buying company has to do is enforce it.
The buying company still has the risk because it is the buying company that disappoints its customers when the buying company can’t deliver. Not a single one of the buying company’s customers cares who the carrier is and what the problem is.
A we mindset acknowledges that business environments change, and the only successful way to truly tackle rising wages is to do it as a cross-company team jointly enabling innovation.
The second pillar needed to establish a value allocation framework is a set of negotiation norms that support problem solving and eliminate a culture of blame. Getting to We explains six guiding principles that all highly collaborative relationships abide by.
The principles act as negotiation norms. They establish the tone and tenor of the relationship and steer a fair course of action when establishing a value-allocation framework. The six principles are: reciprocity, autonomy, honesty, equity, loyalty and integrity.
For the purpose of this article, let’s focus on the interplay between reciprocity and equity. Reciprocity is all about the give and take in the relationship and equity addresses proportionality and finding a fair solution in extraordinary circumstances. Taken together, both companies would seek to give and take on the issue of rising wages, and agree to modify the contract to adjust for wage fluctuations (both increases and decreases) as a pass-through cost to the company.
There are two keys to keeping a cost pass through fair. First, both companies have to establish a mechanism for minimizing the impact of the costs. For example, decreasing costs elsewhere or using labor more wisely to avoid overtime pay. Secondly, both companies have to trust the data whether the hourly wage, the hours worked or hours idling. Transparency is important. The more transparent the companies are in sharing data the better able they are to problem solve in a meaningful way.
By Way of Example
Say, for example, that your company’s logistics provider immediately warns you that wages are rising, that the pool of available long-haul truckers is shrinking industry wide and they would like to brainstorm ways to address this issue with your company.
If you have a highly collaborative relationship, it is both companies’ problem, as it always has been. But instead of fighting over the price and demanding guaranteed savings, you and your service provider develop a framework for addressing rising costs.
The framework should incorporate these five concepts:
One: What’s-in-it-for-we mindset. Remember that as the buying company, it is your risk to deliver to your customers. You do have a role in solving the pressure associated with rising wages, especially when those costs are industry wide.
Two: Have a balanced approach to cutting costs. The best solution will have actions by the buying company to reduce or use consumption more wisely and efficiencies on the service provider side. In other words, each is doing what it can control.
Three: Ensure reciprocity. No one likes feeling pressured to accept a bad deal. Too often in a value claiming negotiation, one company is giving more than it is getting, but as soon as the tide turns, the “loser” gets even in some way. Each company should give and get something out the deal.
Four: Develop an equitable plan to compensate the service provider for “idiosyncratic” investments, meaning those that favor only your company. If the solution to rising wages and too few drivers requires an investment by the logistics provider that solely benefits your company, the buying company has to compensate the provider for the investment. It is unwise and unrealistic to expect investment without a return. Likewise, provider investments that will provide significant long-term savings, such as equipment upgrades and system investments beyond direct labor, need to be compensated for.
Five: Get stakeholder buy-in at the top levels and hold them to their promise to support the measures you’ve negotiated. There are negotiations in which a senior leader at one company (the one with the power at the time) makes an unrealistic demand at the 11th hour that derails months of work by hard working team members. Bad behavior will literally freeze people out of the process and create an environment with little or no innovation.
You may have at least one at risk vendor in your pool and that vendor is likely facing pressures that are industry wide. Rather than take a more traditional value claiming approach to negotiating (or enforcing) the agreement, try establishing a value-allocation framework instead. Business happens all the time. The what’s-in-it-for-we mindset and guiding principles have proven themselves up to the challenge of addressing difficult situations head on and in a fair way. Are you up to the challenge of trying a new negotiation approach?
Jeanette Nyden works to transform underperforming business partnerships into collaborative relationships. She has written three books, including: Getting to We: Negotiating Agreements for Highly Collaborative Relationships.
Peter Moore has over 30 years in Supply Chain Management and Operations in industry and as founder and leader of a third party logistics company. He has served as North American Leader for Ernst and Young and the Capgemini Logistics Consulting Practices.
