Yesterday’s HBR Management Tip of the Day “When Taking a Risk is Safer than the Status Quo” caught my eye. The point of the article was that:
- “Most of us would consider ourselves to risk averse” and
- “What we consider to be “safe” behavior often contains much more uncertainly than we expect”
The article focuses on personal examples but I have a few VERY dramatic Sourcing / Supply Chain examples from clients that I believe clearly illustrate the point the author is trying to make. So here goes . . . . . . .
We were asked by a client to come in to negotiate an ERP software deal which was worth over $100 million. We negotiated with the two finalists even though the client had a strong preference for Supplier A. Their decision process was driven by one of the Big 4 consulting firms which had been working with them for almost two years on this initiative (Phase 1). To make a long story short, our client ended up selecting Supplier B under a very favorable deal structure. Next they needed to select a consulting partner to help them implement the software and they wanted to work with that same Big 4 that helped them make the Supplier A decision (even though Supplier B was ultimately selected). The reason for this decision was FUD. Now, you are asking yourself – what the heck is FUD? It is the Fear, Uncertainty and Doubt that the Big 4 firm planted in their head – telling them that switching to a new supplier would cause TOO much risk to the overall project. As we were preparing to negotiate with this Big 4 firm, we uncovered that there were many problems in Phase I. In addition, the supplier was not willing to make any changes to ensure success for Phase II, assuming that the FUD would ensure they would not be replaced. THEY WERE REPLACED and the new supplier took on the transition risk – there was none. Sticking with the Phase I supplier would have been a disaster. In this case doing nothing would have been a bigger risk than making the change.
Here is another example. A few of our clients have gone out and hired an MSP to manage temporary labor. These clients have as many as 500 temp workers on site at any one given time – a real administrative nightmare. In both cases, the relationship with the MSP turned out to be a disaster to the point where the function was brought back in – house. The relationship started out bad (if it starts out that way, it usually doesn’t get any better – think marriage) and got worse after implementation. Again, our clients looked at the significant investment they had made and thought that the status quo (trying to make it work with the MSP) was less risky than bringing it back in-house (WRONG). It took many, many months for them to face the fact that doing nothing (keeping the MSP) was causing significant operational issues and damaging the reputation of the supply chain organization.
Suppliers are experts at playing the FUD card. Here are a few tips for evaluating your risk:
- Do research for other potential options. There are always other options. Develop the Pros and Cons of each, it will help you to make the right decision.
- Get expertise from credible sources. Many times you are too invested in the Status Quo and need a third party to give you an objective opinion and alternatives
- Evaluate the risk inherent in the status quo. Risk averse people have a tendency to look at the status quo as the “devil you know” as opposed to the devil you don’t. Falling into that trap can result in prolonged pain and Be MUCH riskier than moving to other alternatives.
If you are experiencing issues with any of your current supplier relationships, take a fresh look. Doing nothing can be riskier than you think.
Let us know what you think and join in the conversation.