Most companies invest a significant level of resources in activities designed to identify business partners and secure a relationship with them. Sales leaders typically identify the strategic targets that they want to win over in each year’s annual plan. Strategic sourcing leaders place a critical importance on finding those suppliers that can make a difference to their organization’s success and bringing them onto the team. Executives responsible for numerous business functions – from R&D to logistics to information technology – look to identify partners that can help them solve their most challenging business problems. But all too often, these same firms think that they have achieved success once handshakes are exchanged and contracts are signed. In truth, that’s when the real work begins.

Part of that reflects the characteristics of strategic business relationships between suppliers and their customers. Most are large, but that is the least important and least discriminating characteristic of such relationships. Higher-level strategic business relationships are complex and multi-dimensional, which is why such effort is required to ensure that they deliver value to the shareholders of the firms involved. The table below provides some perspectives as to such complexity and dimensionality:

It is a major challenge to progress to even the Strong Preferred Supplier-Customer Relationship level shown in this table. In fact, we find that only about 30% of large supplier-customer relationships ever progress beyond the traditional transactional, on-again and off-again, relationships that are common in business markets. Those organizations that move beyond that level typically realize great benefits along multiple dimensions, providing the motivation driving firms to identify and implement such relationships.

The challenges of developing a strategic business relationship are illustrated by a short case example involving two firms that had entered into a strategic supplier-customer relationship in the telecommunications industry, just over a year ago. Many individuals in each of the two firms had believed for some time in the potential offered by this relationship, but had seen little progress in getting it out of the starting gate. As they discussed what to do in a meeting in late 2010, an executive in the supplier organization made the following comment:

“We walk on eggshells when we meet. There is always a tension in the room. Is it appropriate to share this information? Will raising [a topic related to a new technology] just trigger another discussion on price? We value having them as a customer, but nothing feels strategic to me.”
His counterpart in the customer organization offered similar observations about the past history of interactions between the two firms:

“There is no sense of urgency to our discussions. It seems like everyone is waiting for someone else to take the first step. We were excited about the possibilities of shortening our product development cycles through the relationship with this supplier, but it hasn’t happened yet. In truth, while they’re a good supplier, they’re no different than any of the others out there, at least in terms of how this relationship has performed.”

Such statements are common in the early stages of a business relationship. In this instance and most other situations, the problem is not with the two firms involved per se. Rather, it’s a reflection of a failure to do the “heavy lifting” necessary to ensure that the potential of a strategic relationship delivers on its promise.

In this article, three actions are recommended as ones that should be taken to put the foundations into place for elevation of a strategic relationship between a supplier and a customer, or, for that matter, any two firms that want to elevate their relationship to a higher level that yields shared successes and rewards for both firms’ shareholders. The actions are illustrated using the experience of the two firms whose executives were cited in the quotes above.

Measurement Matters – and Motivates

The first action is to define some form of dashboard that defines the performance metrics important to the two firms involved in the relationship, along with explicit (largely quantitative) goals for each of those metrics. It is remarkable how many significant business relationships operate without an explicit statement of the performance goals that are important. And it is even more remarkable that in the study of “relationships gone sour”, the vast majority had either never defined performance metrics and goals or only done so in a vague way. Operating without clarity in terms of goals and objectives for performance is like trying to put together a bicycle on Christmas Eve without a set of directions. It rarely turns out right.

It is often useful to think of two categories of performance metrics. The first category of metrics that should be included in the dashboard involves basic “blocking and tackling” metrics that are important to the relationship. These may include such fundamentals as metrics relating to quality, on-time delivery, and support levels. The second category of metrics that should be included in the dashboard involves those that are unique to a “strategic relationship”. After all, only rarely does a customer choose strategic suppliers on the basis of the size of the buy from that supplier.

Far more often, the choice is made because the customer believes the supplier can contribute to shared successes.

The dashboard structure developed for performance metrics was simple and straightforward. For each of fourteen metrics that were selected (spanning dimensions like quality and on-time delivery), a specific goal was established and the basis by which quarterly results would be calculated was defined. The latter discussion was eye-opening, as the two organizations found that their own calculations along some dimensions were inconsistent, opening the potential for the supplier to believe that they were doing well at the same time the customer would be raising concerns about shortfalls. This is not the first time that I’ve seen such a situation, and in this instance, there could not have been a better reinforcement of the importance of the two organizations having an open and explicit discussion about metrics and measurement. At the quarterly reviews now being conducted by these two firms, they see a chart for each metric, spotlighting any metrics where performance has dropped out of the Green Zone (meeting or exceeding goals) as well as allowing them to see any trends that are taking place in terms of performance.

The dashboard structure developed to assess the progress in developing the strategic relationship itself reflected the elements of the table above. The two individuals who were the relationship champions in the two organizations agreed to provide each other with a quarterly evaluation of what was going on using a five-step color-coded scale (Bright Red, Light Red, Yellow, Light Green, and Bright Green) reflecting their assessment as to what had taken place during the prior quarter using the simple table below:

The two relationship champions saw multiple contributions from this dashboard. First, it allowed them an explicit way to ensure that they were on the same page – and it’s all too frequent that perceptions vary widely between the two organizations. As they hand each other their own version of this simple table, the similarities and contrasts quickly define where to focus discussions. Second, they wanted a mechanism that went beyond performance assessment, one that asked them as relationship champions what they needed to do in order to avoid the relationship “continuing to stall in its attempt to get out of the starting gate”. And finally, the executives involved both made a similar comment: “There was no way we were going to report back that we had failed, that the dashboard started red and stayed red. We were going to drive results.” When a relationship is put into the spotlight and leadership teams are looking for progress, it is highly motivating.

Focus on the Future

The second key action builds on the following fact: a characteristic of best-in-class business relationships is that there is a constant focus on the future1. It stands in sharp contrast to the situation that exists in weak or troubled relationships, where almost all discussions are either about past problems or near-term transactions. Therefore, a second priority in creating foundations for long-term strategic relationships is defining the future-oriented topics on which the two firms should collaborate. To a significant extent, this action defines the content associated with the concepts included in the simple dashboard used by the relationship champions to drive progress in elevating the relationship towards a strategic level.

Two examples illustrate the content of the future-focused plans developed by these two organizations and the motivation behind activities that found their way into the dashboard. The first was a recognition that the strategic relationship should yield some significant cost savings as the two organizations looked for ways to optimize their combined operations, gaining benefits beyond what could be achieved by each organization doing so in isolation. They agreed that each firm needed more information in order to make progress, requiring that cross-audits be conducted of key elements of each firms’ operations. Teams from each company were assigned teams to do such audits. The goal of this process was first identify the best opportunities for savings, and then to define action plans and assignments to achieve them. The second example was a shared recognition that future growth would likely be concentrated in emerging markets such as China, India, and Brazil. The expectation was that both firms would have to invest in product development efforts to meet the needs of such markets, but that explicit insights as to customer priorities was needed to guide such efforts. A Steering Team including individuals from both companies was designed to direct and then assimilate the results of such work, thereby defining product development plans for the two companies. As both of these examples suggest, the two firms focused on their future challenges and opportunities and emphasized assignments that would allow for the development of joint plans to respond to those challenges and opportunities.

The potential roster of such topics is almost endless in most industries. The two firms used as an example here actually developed a list of over twenty options before culling it to a short list of five that would be given initial priority. One of the most exciting parts of any strategic relationship is discussing which future-oriented topics should be given priority. Some choices are obvious: a new product release, the need to meet a new regulatory standard, etc. Others may have been defined by actions taken by one or both of the firms: expanding the relationship into a new market, incorporating a new technology into the product line. But many other options exist beyond these obvious ones, and the more effectively the two organizations can engage in a creative discussion of such options, the more likely they are to identify collaborative action plans that have a real potential to create value for both firms.

Strategic Relationships Require Management

The third action to be taken to create the basis for a long-term relationship is that of defining a formal plan through which the relationship should be managed. As we’ve studied significant business-to-business relationships, it is remarkable how many rely on informal processes and interactions to manage the relationship. Like the failure to define performance metrics and goals, this can be fatal.

Developing a relationship management plan has what, who, and when dimensions. The “who” roster can be extensive. It should include the individuals who are the point persons in managing the relationship, a pair of executive-level champions, and a roster of individuals across functional and geographic segments of the two companies that are relevant to the transactions and priorities that define the relationship.

The “what” and the “when” elements of the relationship management plan will be driven by the performance management dashboard and the specific future-oriented priorities that are defined. In virtually all strong supplier-customer relationships, there are meetings at a quarterly frequency, or more often, with a formal agenda and an explicit review of progress vis-à-vis the goals and objectives. Ideally such meetings will involve the point persons, the executive sponsors, and they key participants from the two organizations that are involved in an ongoing basis in the relationship or are central to the topics on the meeting agenda.

One of the imperatives at such meetings is that there is full and explicit discussion about the health of the relationship and the progress each of the two firms is making in helping to realize the goals that have been established. Among the hard questions that should be regularly asked in strategic relationships are some straightforward ones like “In terms of your expectations and priorities, what has changed since we last met?” and “This is what we’re hearing from others in your organization in terms of priorities, and this is how we plan to react to it. Are we all on the same page?”

The two firms used as a case study in this article are pleased with their progress over the first half year. In recent discussions with the two individuals that took leadership responsibility for the relationship, they emphasized three elements of progress. First, we now have real activity underway, on topics that matter and with assignments that are explicit. There is accountability in both firms, as the plans won’t be accomplished unless both firms work together. While results aren’t yet in, both firms expressed optimism. One executive observed that “The engineers involved in the cost reduction project have identified explicit targets, more than enough to ‘move the needle’.” Second, the communications between the two organizations are dramatically better than before, with individuals and groups talking regularly that had never heard of each other before. Both firms cited a side benefit in terms of improving day-to-day operations, as “people now know who to call and were no longer fearful of making a call”. Third, the process seems to have regenerative properties, as the first several quarters of interaction have yielded fresh ideas to replace those that were commissioned initially. One executive commented that “This is another example of what happens when you let good people do their jobs”.

Summary

Strong business relationships can yield rewards for both of the firms involved. When a relationship is recognized as strategic to the businesses involved, they must take proactive steps to ensure that the relationship is managed so as to ensure that the value being created is sustained over time, despite the inevitable changes that will take place in both organizations and in the business environment. The key actions that must be taken fall within three categories. The two firms must reach a clear understanding as to the key performance metrics and goals that will define success for the relationship, including those that elevate the relationship to strategic status. They must identify the highest-priority future-oriented themes on which they can collaborate and achieve shared successes. And they must put into a place an explicit relationship management plan that includes “What-Who-When” details to guide assignments, resource allocation, and interactions. When these actions are taken, the two firms involved have established the foundations for an ongoing stream of shared successes that reward both firms’ shareholders.

Author: George F. Brown, Jr.