Financial Cost of Bad Trading Relationships

As you have heard us mention before, we find IACCM to be in a unique position to help change the discussion around how organizations enter and optimize trading relationships because they have both the buy and the sell sides represented as members.  We hosted a webinar today with IACCM where Anne Kohler led a discussion around the value destruction that occurs in our trading relationships today (feel free to reach out to her for a copy).  What if I were to tell you that 4 companies in the auto sector are losing $2 billion annually (Henke) in their bottom line due to poor trading relationships?  And that is only measuring the impact to these 4 companies (GM, Ford, Chrysler and Nissan) – it does not include the impact to their trading partners – it’s only the impact on one side of the relationship!  You may not accept the accuracy of the number but  the magnitude should cause all of us to pause for a moment.

While we have long argued that Value  is much more than financial impact and that non-financial value has a far bigger impact on driving decisions and behaviours, we did come across this index developed by John Henke that attempts to financially quantify the value of relationships.  And what is true in one industry is equally true in all.  And yet, we find ourselves caught in some kind of vortex from which we cannot escape.  When descriptions of typical behaviours by buy and sell sides were laid out in Anne’s webinar today, 96% of the participants agreed that the descriptions were accurate – 96%!!!  Clearly, we need to rethink how we establish relationships when almost all of us know that what we are doing is no longer working and in fact, it may be destroying value.  Some of you may remember our series which heralded the end of the Strategic Sourcing process or called for its death in its current adversarial form for the very  same reasons.

This rethinking must start with 1^st redefining the end point – it’s not the contract or the prenuptial agreement that anticipates failure and manages the risk of that failure, it’s the relationship that follows the contract.  Research suggests that those marriages that start with a prenuptial are more likely to end in divorce!  It becomes a self-fulfilling prophecy.  No different than McGregor’s Theory X/Y which explained that managers who assumed that workers were lazy (Theory X) ended up with workers being lazy.

What needs to change?  In today’s webinar Anne laid out a four part agenda.  First, we need to redefine the role of contracting.  Then we need to change the context under which the contracting function operates as part of the whole organization which then leads to the  need for totally different competencies.  Last but not least, we need to develop new processes and tools to support the above three.  Unfortunately, most organiztions gravitate towards the last item only.

In her next webinar in this series, Anne  will go into detail about the four items above and specifically talk about how to make those changes happen – hint – it’s not easy but totally necessary and doable!  Isn’t it time that we all start discarding Theory X right away and start adopting Theory Z.  After all billions and billions of dollars of value are being destroyed and 96% of us agree that what we are doing is not working?