Building Win–Win Partnership Solutions- Valutrics
Each of your critical customers has unique needs and unique processes/ways of working. The better you understand them, the better you can deliver the right bundle of goods and services—and be compensated accordingly.
You need to sell solutions and solve problems for your key customers. You need to work with them (which makes being attractive a prerequisite), and you must develop the strategy and supporting infrastructure to make this a reality.
IBM came to the realization some years ago that selling computers was no longer a fun business—and was one that threatened to become commoditized. The business had become cut-throat, and IBM would not survive with its high cost structures and corporate culture. So the decision was made to go into the solutions business. At the time, there was significant doubt that the company could be transformed from a bunch of box sellers to one where the approach was more like providing consulting. But IBM pulled it off.
Sony came to a similar conclusion, finding that selling consumer electronics was a very tough business. Management decided to focus on selling “content”—what comes out of the televisions and boom boxes—so it bought major Hollywood film and record companies. Sony had significant problems integrating the wild US filmmaking and musicmaking culture with its more staid Japanese manufacturing culture, sustaining serious losses. The company finally got everything to work together after years of turmoil.
Key account management (KAM)
Your company team needs to help key customers move up their value chains when this provides them a competitive advantage. What are the order-winning bundles of goods and services for them? How might you help them provide/deliver these bundles? What are the necessary joint changes required to make this a reality? In most cases, the breakthrough payoffs necessitate some new ways for you as a supplier to interact with these key customers. It is collaborative—and more. New infrastructure and ways of operating are required: new procurement processes, new sales processes, joint planning, transaction simplification, and new metrics.
ABB, the Swedish-Swiss engineering giant, is increasing its topline growth by focusing on key accounts, whose revenue has grown significantly faster than that of the company’s regular business. ABB has five major divisions, based on the products provided: Power Products (e.g. transformers and voltage switchgear), Power Systems (e.g. turnkey power-distribution grids), Automation Products (e.g. motors and low-voltage products), Process Automation (e.g. integrated process-control systems), and Robotics (e.g. industrial robots and robotic systems). But many of ABB’s major customers are the same for each of the product divisions. Sending different salespeople to the same customer is not always the best idea. ABB has developed KAMs for these customers. The KAMs can better identify the true needs of a customer, particularly when those needs are for a large project.
The project starts with the customer’s real needs, then identifies the portions of the project that can be provided by ABB’s product- oriented division. The project might also call for items not produced by ABB. Finally, the project is like a systems solution. The project is more than the sum of its component parts; integration of those parts and a timely delivery/ramp-up are a key deliverable. The opportunity for ABB is to help the customer bring the project online and ramp it up: with no problems, with better results, in a shorter time span. All of this implies major payoffs for the customer, especially in terms of improving cash flow. Doing so allows ABB to capture a larger percentage of the project budget, gaining added business for several of its product divisions, perhaps plus fees for managing the project.
Delivering the promise here mandates major change requirements for ABB, and for each of its divisions, as well as for its key customers. The KAM concept sounds like a no-brainer choice. But this assumes the customer is oriented—and organized—accordingly. If the customer does purchasing based on commodities, there may not be an opportunity to sell “solutions.”
On the ABB side, selling/delivering solutions requires coordinating the sale/delivery across product divisions, as well as some overriding form of project management. As the number of customers who are treated as key accounts grows—in a linear way—the complexity of fitting this into the various product division and business unit structures increases geometrically.
Taking on complexity
The key account management issues are only one example of the more general problem of how to sell/deliver what key customers need. You need to develop the competencies necessary to take on the customer’s problems—and deliver integrated systems solutions. It well may be that you will also need to help the customer to overcome problems at its end. For example, if a customer has the “country disease,” a key part of the improvement agenda will be curing the ailment. You might be able to help the customer along the way, creating a very different definition of value/cost in this relationship.
Similarly, you should probably investigate the extent of standardization that your customers have in their products, services, and processes. There well may be large opportunities here. But it is important not to underestimate the accompanying challenges.
It is important for you—as a preferred supplier—to understand your key customers’ problems and challenges. In doing so, it will be useful to know which approaches you have developed that might be modified and used again. It is also important to gather the learning from other examples. To the extent that your company can proactively help key customers solve their problems—with you removing complexity from their lives—you can develop win–win situations and long-term customer loyalty.
So how many of these key account management teams can you mount simultaneously? Our rule of ten is probably a good start, although at some point the new ways of working should become routine. Then, more teams might be deployed.
Measuring the right things
If you and your key customers are to jointly transform the bundles of goods and services you provide, it is critical to establish metrics that indicate when the transformation is going well and vice versa. For the ABB example, one clear set of measures would focus on time and flawless execution: Is ABB delivering the various pieces of the project bundle as agreed? Is the project on schedule, and if not, why not?
What is needed to recover? When do we know there is trouble? How do we make sure that problems are not hidden? How do we respond to new requirements not foreseen at the outset? How can ABB and the customer act like a true partnership? All problems are our problems—not mine and yours.
Measures that focus only on concrete performance are not enough. Once again, we strongly recommend use of perceptionbased metrics to see how various individuals feel about the ways the two firms are working together. It is useful to periodically ask many people in both companies their opinions (something like a five-point scale) on topics such as:
• Is this joint effort a win–win?
• Is our partner sharing the rewards?
• Is our partner holding up its end in the joint work?
• Does our partner do its homework?
• Can we depend on its people?
• Does it make decisions expeditiously—and stick by them?
• Can we trust our partner?
• Do we share common objectives?
Making these assessments on a periodic basis allows you to develop a time series, to assess alignment inside each firm—and jointly. Further, problems can be seen before they get out of hand—and before they result in poor results in the concrete measures. That is, the perception-based measures are a leading indicator; concrete measures will lag.
Finally, you need to understand that neither you nor your key customer ever will truly know what each other needs—you must jointly figure it out as you go. In fact, whenever you think you know, you must jointly step back and see how you can augment the “needs.”
Rubik’s cube of customer–supplier partnerships
Rubik’s cube depicts four critical issues for making a customer– supplier partnership a reality.
Each of these four issues implies an imperative. They need not only to exist but to be continually enhanced:
• Win–win takes on a new meaning and necessary new definition as the joint effort between customer and supplier evolves.
• Trust necessarily helps growing in depth, which supports new initiatives.
• The strategic evolution: The strategic objectives must be expected to shift—for each of the partners as well as for the partnership.
• Reducing misalignment is an ongoing part of the partnership process.
Making win–win real
In creating and maintaining a true win–win relationship, there is a natural tendency to overly consider your own problems and your own gains— and classic measurements reinforce this bias. A telecom firm wished to reduce its pipeline inventory with a major customer from more than 200 days to something like 75 days, and was surprised when the customer showed no enthusiasm for this great idea. There was nothing in it for the customer—in fact, more inventory allowed it to make last-minute adjustments to its building plans.
The natural win for a customer is joint cost reduction in the chain, which allows the price to be reduced—but this must not be achieved at the expense of supplier margins. The natural win for the supplier, in addition to margin preservation, is increased volume. However, these tend to be the first set of win–wins. The key issue is to update the win–wins for each new joint project, and to be clear on both sides that expectations are indeed being met.
For an aircraft manufacturer, the payoffs for standardization with a major supplier were definitively reduced prices, while the supplier’s margins actually increased because of its ability to manufacture at significantly lower costs. But now, in switching to the objective of non-recurring cost reduction, the two firms need to make explicit many costs on both sides that have been hidden in prices, such as the time to prepare lengthy documents, respond to quotations, and argue over claims made by end customers. These often fall more on one side than the other and are difficult to assess, but not assessing them assumes they are unimportant—perhaps the worst possible assumption. Win–win needs to always be explicit—and continually updated.
For Numico, the win was innovation and new volumes, along with improving the company’s image with retailers as providing new market opportunities. For its supplier, Babynov, the initial win was a new major customer with the associated volume increase, validation of a new product concept, and the experience of a product rollout in a new geographical area. But thereafter, the two firms needed to achieve savings in data collection/analysis, pipeline inventory reduction, improved scheduling and capacity utilization, and greater total sales for both firms. Again, achieving these goals required joint efforts and some means to keep track of who made the efforts and where the payoffs were manifested.
Second order win–win
What is needed to nurture a relationship? What will erode it, or kill it off? The relationship between Hewlett-Packard and Canon has been touted as a great win–win example, with the unwritten rule at HP: screw it up and you are fired. But when HP bought Compaq, there was a new executive team. The CEO did not believe in the mythical relationship with Canon, and decided to start treating it like other suppliers. From the Canon side this was very upsetting: The two firms started to move into the zero-sum model, and the “marriage” was on the rocks. Fortunately for the relationship, this CEO left HP, and the partnership recovered. It is once again healthy.
So what is the key lesson here? Win–win needs to be seen in an overarching framework, one that is not subject to whim. But there is a constant risk that the win–win relationship will go off the tracks. In general, the longer the partnership has existed, the better are its chances of continuing.
Those most new are at greatest risk. The appeal of former ways of thinking and operating are closer to hand. But there is more than time of the partnership. Complacency can go hand in hand with time. There must be a continual search for new levels of win–win, and each firm must compare these with its other alternatives. The HP–Canon special relationship can only stay special if both HP and Canon continue to see clear benefits accruing, and these exceed those that might be gained by working with others.
There is a collective joint investment in working relations that can and must be capable of continuous improvement, as well as leverage to achieve new heights. Achieving new heights requires ongoing investment in time and energy: An aggressive improvement agenda needs to be established—and achieved!
Creating/nurturing trust
Trust is perhaps the hardest to maintain, and the least obvious to define and assess. There is also typically a large difference between what is expressed as an overall feeling, and the reality. In one recent case, senior executives in both firms felt they had achieved a reasonable partnership and good results. A new working arrangement had led to a significant increase in volume with major business for this supplier—business that was originally expected to go to a competitor. However, many in the customer company were suspicious that this increased volume would lead to monopolistic behavior by the supplier. And on the supplier side, there were feelings that the extra business must have been achieved at lower margins, meaning that the customer would surely apply further cost squeezes. The key message here is that trust will always need to be enhanced—continuous improvement requires it.
Trust, like win–win, has increasing levels of depth and requirements. Even more important, trust has a similar need for joint investment and a sense of fairness. If the customer asks for some measure of trust from the supplier, it must expect to reciprocate— perhaps without being asked. A bad example we often see is customers asking for all sorts of additional information from a supplier, including detailed cost breakdowns, while at the same time not accurately sharing known demand information—and making minimal commitments for future business. This behavior reduces trust rather than increasing it.
When a customer–supplier partnership means making a pair of sevens into a pair of jacks, the level of joint trust needs to be greatly expanded. This can easily become the major hindrance to achieving stronger partnerships. The trust required to jointly implement a standardization program is significant, but going beyond to tackle non- recurring costs is much more fundamental. Most companies will surely resist replacing complex legal documents with less formal approaches, but you truly need to ask why.
Second-order trust
What are the fundaments of trust? How does one move beyond platitudes? How is trust nurtured, and how is it most easily broken? Most people are innately suspicious, and any unexpected action by the other party in the relationship tends to be seen negatively. Similarly, most people tend to believe they are operating with the best of intentions, and everyone else can easily see that this is the case.
These observations are a potential train wreck to any partnership, so they need to be mitigated. Trust tends to be developed both top-down and bottom-up. It is critical for senior level executives to meet socially and develop an ease/understanding with counterparts. In general this can occur when there is a particular issue at hand. In some case partnership, there was a group who established “governance” and this established the initial top-down linkage. The bottom-up occurred when there were concrete issues assigned to cross-company teams to resolve. But the top-down and bottom-up trust had to be augmented when the focus shifted to more than immediate turbocharger issues. The process by which this takes place needs to become as clearly defined as possible. It should not be left to chance and be the sole result of specific cross-company issues. The top-down should bubble up to more senior people on both sides, and the bottom-up needs to spread as needed. Both need to be driven with a shared vision and purpose: The two firms believe in this partnership, they can continually demonstrate new win–win results, and specific executives are openly committed to furthering the collaborative relationship because it is the best interests of their company.
Building partnership strategy
The importance of shared vision and common strategy for the partnership is the third of the four imperatives. If a customer and supplier do not see the road ahead in a consistent way—one in which they are both better off through working collaboratively— then the partnership will probably never go beyond a pair of threes. The two firms must truly believe that by working together they can create a much stronger core competence than they could by working independently. Building the future through enhanced partnerships requires an ongoing process of identifying new strategic objectives— and the detailed projects required to achieve them.
Honda has developped a “super-supplier” relationship with few of its key suppliers . These are clearly pairs of aces that incorporate carefully integrated strategic decisions and operations. The payoffs largely come from integrated operations that use the suppliers’ capacities at very high utilization rates, supported by rapid (and full) information exchange. Enhancements focus on ways in which the most expensive assets in the chain can be “sweated” at even higher levels, as well as when to add more assets and how to sweat these as well.
Strategic integration requires both an overall shared vision/sense of direction, and a clearly articulated set of objectives for each major improvement project. In each case, the win–win needs to be well understood and achieved, the trust needs to be enhanced as necessary, and the two firms need to communicate the new initiative as being a strategic objective for mutual advantage. In both companies, this viewpoint will need to be explained—much more than once. Nokia’s mandate for “shared values” epitomizes this imperative. If Nokia and a supplier do not see the world ahead in a common way, there is no point in trying to form a partnership.
Whether or not it seems to work in the short run, without shared objectives, the necessary continual enhancements cannot be realized. Nokia’s efforts are better expended with another supplier or customer.
Second-order partnership strategy
Key issues in partnership strategy need to focus on framing the agenda for the future: What is the win–win, both immediate and long-term? What can the two firms achieve jointly that is significantly better than either can achieve alone? How do you put this into a set of projects
and assign the key people to make each of them a reality?
• What new product opportunities should Hewlett-Packard and Canon identify? Which are short-term and which are long-term? What are the specific benefits that each firm will achieve if the developments are a success?
• What should Bombardier and Knorr-Bremse do next? What are the ways in which they might jointly transform the after-sales service market for train maintenance? Capture the Chinese market? What are some short-term objectives, such as a joint bid on a new large train project?
• What should Honda and its steel parts supplier do next? Should the supplier now outsource some of the easier parts to concentrate on more complex stampings? Should the two firms jointly design some new metal parts? What processes at Honda are better developed at the supplier?
• What competencies does Nokia—and its supply chain—need to develop for the future? With which “magic ten” partners should it form a very intense partnership?
Alignment management
There will always be misalignment, and it needs to be effectively managed. Doing so is a key part of the “grease” needed to run the continuous improvement engine. Every person in the customer company will have his or her own opinion about the supplier, based on history, war stories, folklore, or rumor. The same holds for the supplier side: People will remember various stories—even when untrue—and repeat and even embellish them over time. The key is to keep these opinions in bounds and to quickly act when they become disruptive. It is important to influence this pattern positively—to create “good stories.”
Another term for what is needed here is untangling. Every customer–supplier relationship has a history as well as perceptions as to what happened, who was at fault for various things, and who can or cannot be trusted. There is a natural tendency to blame others, particularly those at a greater distance. It is healthy to get as much of this as possible out in the open, sort it out, and strive for a blame-free environment. We have found that having an ombudsman for both the customer and supplier companies can be very useful.
The role of the ombudsman is to continually look for misalignment and settle issues quickly and positively. Another concept that seems to work well is the establishment of a council made up of key suppliers. They in turn share best practices and make improvement suggestions to the customer. These might be in terms of new processes, or they can provide insights into misalignment issues and how they might be resolved.
Second-order alignment management
Second-order alignment issues need to focus on the ways in which conflicts can be avoided in the first place, and ways to overcome the natural resistance to greatly increasing the level of joint activity between customer–supplier partners.
• As ABB fulfills its goal of increasing its sales to Caterpillar from $50 million to $500 million, it will be necessary for a vast number of people in both firms to not only understand this move, but support it—because it is very much in the interests of both firms to do so. Flawless execution of whatever the partners decide to do is absolutely essential. Moreover, each such effort needs to be seen as a win–win, because this can be clearly demonstrated: This partnership is superior to any other way to support Caterpillar objectives. As the business between the two firms expands, more and more people will need to become convinced and committed, sequentially. This implies the need for a carefully sculpted proactive approach to managing misalignment.
• A similar set of issues faces Nestlé as it implements its Project Globe. Internally, everyone needs to first accept, then believe in the importance of operating as an integrated unit. But it is even more critical to thereafter adopt an integrated supply chain. This implies changing hearts and minds: At Nestlé, at key suppliers, and at key customers.
Driving the procurement agenda
At least half of the work in enhancing customer–supplier partnerships involves major changes in procurement. In fact, our experience leads to the conclusion that it is significantly more than half. Many firms have had to clean house in their procurement organization, or at least, have had to develop definitively different sets of strategic objectives for supplier partners, find ways to separate the rottweilers from the collaborative work, determine who does what, and create different metrics for the two groups. In order to “build the future,” it is imperative to go beyond a few pilot programs in partnership—and unlearn many aspects of classic procurement.
Establishing the culture
Moving from a procurement culture based on combative approaches to one with a mixture of combative and collaborative creates a certain amount of organizational schizophrenia. Classic negotiation strategy dictates that procurement people be tough with all suppliers, but now this approach needs to be split into combative and collaborative. Managing the two approaches simultaneously is not easy, and the senior procurement managers must establish differing modes of behavior, conduct, and performance measures.
The expectation is that the relative proportion of procurement (in terms of total purchasing spend) will shift toward collaborative relations, but this movement needs to proceed in a controlled fashion. Getting too enthusiastic about collaboration can lead to a situation in which some suppliers will take advantage of what they perceive as a weaker negotiating position. This can be overcome only by making partnerships one by one, where the win–win is clearly articulated and achieved in every case, and where the subsequent steps in continuous enhancement are also unambiguously defined.
It is also important to recognize the necessary shifts in tactics, work, and allocations of resources. The expectation is that over time, procurement will significantly reduce its supplier base (by 75 percent is a good rule of thumb). Furthermore, standardization efforts should reduce the number of items purchased by another 75 percent. All this takes time, effort, human resources, commitment, new ways of working, and a new set of relationships with both internal functions and functions in the supplier partner.
Very similar change conditions exist for sales and marketing: As a supplier, you need to understand your customers’ objectives, their strategy, and how to help them achieve these. You must act in ways that foster trust and untangle misalignments before they cause major problems. And win–win means helping your customer partners to see how you have jointly achieved key goals—and are ready to establish new ones.
The leadership requirements for moving procurement into a mix of combative and collaborative relationships are critical. The senior procurement managers need to have a mandate from on high, and the determination and staying power to carry out the necessary changes. Sales and marketing face an equally challenging agenda: Segmenting the customers, choosing which are most possible to work with mutually, continually evaluating progress, and setting continuing new objectives.
In both procurement and sales, there is a natural tendency to advocate “partnership” in too many cases. If a firm is known to have favored customers, then each customer wishes to be so designated. So does each salesperson for his/her clients. The same problem exists for suppliers. Everyone wishes to be designated as special and deserving of extra efforts. But this cannot be. We have made the argument for ten many times, and we stick to it.
It may be OK however to “call” many customers or suppliers “partners”—provided you are clear about what this really means. Supporting key individuals
Eventually, certain people will be able to deliver on the partnership promise but many will not. One part of the leadership challenge is to find and motivate those who can make the shift in strategy as well as practice. To some extent, this requires “holding an umbrella” over their heads while they do the new work, insulating them from the predominant culture and ways of working.
Creating segments, segments, and segments
Building the future requires a continuing assessment of the supplier and customer bases:
• Which suppliers are delivering the goods?
• Which customers are most likely to dominate their markets?
• With which ones are we ready to move on to a new improvement project?
• Should our present classification of suppliers and customers continue?
• Are any of these becoming complacent?
In fact, it is critical to not permit complacency to develop in a partnership—it is the beginning of the end.
Each supplier–customer relationship must be continually questioned. This is a two-sided investigation: Either party can cause complacency—and it is both of their faults, regardless of the cause. A good customer–supplier partnership is an investment, one that should—must—deliver a clearly articulated objective. The time that individuals have invested in making a partnership work must not be squandered. This time, expended by your company’s smartest and most motivated people, is your most important resource—usually much scarcer than money.
A related issue: Is each of your key suppliers still providing the bundles of goods and services you need as the customer? Sometimes the technology shifts, and an existing supplier is simply no longer able to provide what is required. Essentially the same problem arises when a new potential supplier arrives bearing a price offer significantly lower than that of the existing supplier (Bombardier calls this a “wild card”). There is an obvious issue of loyalty here but, additionally, one of implied complacency:
Why did the partners (both of them) not anticipate the change in technology and see whether the existing supplier could develop it—and thereby continue to leverage the win–win relationship (whose “assets” are much more than technology)? Why was the partnership surprised by the much lower-cost offer? Were they not benchmarking properly?
Making innovation the big game
Utilizing supplier brainpower to support innovation can, in many cases, provide the truly great source of competitive advantage. Joint R&D is, obviously, one means to this end. Many electronics firms have worked jointly with integrated circuit manufacturers to develop chips that allow advanced product features. A more powerful concept comes from the ideas around value chain positioning. In essence, the customer and supplier need to continually search for the winning combination for the customer—with its customers (the enhanced bundle of goods and services)—and then jointly work to develop this combination. This will typically involve outsourcing: Who is best equipped to do what? How might we bring new products to market sooner? Who should buy raw materials? Who has the lowest cost of capital—and therefore should finance various investments?
A major issue in customer–supplier partner innovation concerns which partner should be concentrating on which areas of research. How will the specialization and integration develop over time— particularly as the supplier moves up the value chain and the customer outsources more of the value to the supplier, and the supplier becomes more of a systems integrator? Additionally, what are the new research directions for the customer? Without win–win, trust, shared strategy, and management of misalignment, none of this is possible. In joint innovation, there will be key issues of intellectual property, confidentiality, and exclusivity. All of these can be addressed—and leveraged for joint benefit—only by having the basics in place.
The purchasing agenda can also include finding innovative ways to increase the product line. Thus, at Hewlett-Packard, purchasing asks sales what they wish they had to sell that HP lacks time to design and make. Purchasing then finds suppliers interested in designing these items, to be sold under the HP brand.