Matching Buy/Sell Side Risks – Contracting as a Competitive Differentiator

Having been on both sides professionally and having worked with clients on both sides, it has been a patient wait to start seeing the convergence of managing buy and sell side risks in organizations.  While there are a few out there (Raytheon – David Wilkins (disclosure – we have done some work for him), most organizations have not sought to optimize risk management by aggregating risk from both sides and managing it accordingly.  Tim Cummins, IACCM (disclosure – we have done lots of collaborative work with him) has been leading this charge in the professional contracting community for quite a while and it looks like the notion may finally be gaining some traction – Hallelujah!!!

Trading relationships (whether with customers or suppliers) carry risks and the most successful organizations do the best job of managing those risks.  What is surprising is that most organizations still manage those risks independent of each other when in fact they are totally dependent on each other and are inextricably linked?  I would have thought by now that the processes that establish those relationships (commercial contracting) would have started being integrated?  The roles and organizations would have started down the same journey?  The head of an organization at the C level responsible for trading relationships would be responsible for integrating and optimizing the risk in those relationships, be responsible for a commercial organization that helped establish those relationships, have integrated processes etc. etc.?  That would be a huge competitive differentiator!!!

Let’s say you are like one of our clients who was out selling very large projects as part of a joint venture and the customers in that market are much more concerned about the predictability and stability of their costs and not just lower costs.  However, their buy side organization was driven by getting as much cost out from their suppliers with short term contracts.  Or another client where their customers were not going to hold any inventory and expected our client to hold it for them with close to zero lead time for fulfillment.  Unfortunately, our client’s  inventory organization was driven by also keeping inventory close to zero and their buy side relationships did not account for that risk and therefore our clients’ suppliers could not be held accountable.  I am sure that you have seen many such examples of establishing the trading relationships for either side independent of each other thus sub-optimizing overall risk management.  This is no different than managing risk on a portfolio basis.

The processes to establish these relationships are or definitely should be mostly the same?  The competencies needed to establish those relationships are or definitely should be mostly the same??  Monitoring and managing the risks is or should be mostly the same???  Why then do most organizations continue to NOT apply the portfolio concept?

The biggest challenge is that the context of these discussions in most organiztions has not changed.  We as a profession have not been able to redefine our role in terms of the Value Drivers of ALL our stakeholders and then have that new role accepted and supported by the executive leadership.  We have not been active in reaching out to our counter parts (buy/sell side contracting organizations) and start identifying the natural integration points.  We have not acknowledged that the competencies required (All the Strategic and most of the Tactical) are the same for both sides and at minimum start training them together with perhaps even cross rotations.

We are co-facilitating(with Tim Cummins) a lengthy discussion with 35-40 senior executives responsible for establishing trading relationships using these question next week at the annual IACCM conference and will be reporting back the results of those discussions.