Supplier relationship management is tricky, and many organizations are unknowingly mismanaging their supplier relationships. From tunnel vision to a dangerous vendor “lock-in,” a mismanaged supplier relationship almost always impacts your bottom line… even if — and probably especially if — you can’t see the problem.
Mismanaged relationships are more common than you think.
Less than 48 hours before I started drafting this article, I had dinner with someone who works in city government. He told me a story about engaging with a technology consulting firm to build timesheet software. The rationale for choosing this particular vendor, he said, didn’t make sense. But even after the decision was made, there was still an expectation that a product would be built on time and on budget. Regrettably, the proverbial ball was dropped by the buyer. Perhaps it’s not surprising then, that after years of delay and cost overruns, the city finally sued the firm.
While most mismanaged supplier relationships don’t result in litigation, they are almost invariably costly. And though it might be hard to pin down the percentage of client-vendor relationships that are mismanaged, it seems as if everyone who works in an organization with some degree of scale has a story about the subject.
Problems arise at any point in the relationship.
Challenges relating to supplier management are particularly insidious because they can arise at any point in the relationship, beginning in the discovery stage. Even an organization that runs an RFP process using best practices might be challenged by not finding — and subsequently including — the right suppliers. Those organizations that nail discovery, but make compromises on their RFPs, might also end up with the wrong suppliers.
Like any relationship, the client-supplier dynamic can change over time. In some circumstances, the goals of the client’s business and the supplier’s business diverge over time. Even when things go well, there can be complications. One example is when a vendor’s strong performance leads to additional selling into the buyer’s organization. Liz (Brady) Witherspoon, a Principal Consultant at Forrester Research, explained:
“It is not uncommon for a division to have the same software implemented 15 times in 15 different locations in 15 different ways, when maybe it could have been implemented one time across the board.”
Interestingly, one of the biggest challenges that organizations face is far more mundane. A surprising number of organizations don’t even know whether a supplier is delivering as promised. Unreported dissatisfaction will typically not result in change. And, with certain kinds of engagements where the passage of time makes a supplier’s solution “stickier,” it can become increasingly difficult to get disentangled from a bad vendor.
In fact, in some situations, the vendor might exhibit better staying power than the buyer’s employees. Absent a mechanism for maintaining and transitioning institutional knowledge, the buyer risks ceding control of systems and business processes relating to the vendor’s product or service, raising the risk of “lock in.” The ramifications of breaking from “lock in” can be significant in terms of cost, time, and lost production. When an organization wants to free itself from “lock in,” it is essentially looking at a reboot with the added expense of migration. Unsurprisingly, breaking a “lock in” may well require significant reorganization of the company, production loss, and cost.
How to spot a mismanaged relationship
So how do you know if your supplier relationships are being mismanaged? Check if any of these apply to you and your company:
- Your company awarded a substantial contract without a proper sourcing process
- There are multiple, partial, or wholly redundant contracts with the same vendor
- You don’t know what contracts you have
- You lose the ability to switch suppliers easily due to lock in
- Your contracts terminate and/or auto renew without anyone’s being aware in advance
- Spend increases slowly, but significantly, over time without anyone’s noticing
- You lose track of “market pricing” and you don’t know how your suppliers’ pricing competes with those of their competitors
How to avoid and get out of a bad relationship
Break-ups hurt, but a thoughtful “conscious uncoupling” can be less painful than a continuing relationship. Here’s how to avoid and catch bad vendor relationships before they become a bigger issue.
1. At a minimum, you should be keeping track of all of your suppliers, contracts, and some indicia of vendor performance somewhere. Paper and spreadsheets aren’t the best way to keep track of your business relationships, but if that’s all you have, then it is better than nothing.
2. To reduce the risk of being locked in with a particular supplier, invest in supplier management software that simplifies the process of keeping track of all of your supplier-related data and information. This not only removes the likelihood of losing notes and data, but the software would likely give you greater insight into your relationship with your suppliers.
3. If you really want to level up your management game, marry supplier management software with a Vendor Management Office. A VMO is in charge of evaluating products and services, maintaining vendor relationships, and covering the day-to-day communication with vendors.
4. Should you relate to any of the mismanaged relationship red flags listed above, choose a way to steer your vendor relationships in the right direction before they own that portion of your business completely.
Looking for other ways to choose the right vendor? We’ve laid out the benefits and disadvantages of the three different methods to manage your sourcing process.