Why Do We Keep Destroying Value Part I

Contracting:

Why Do We Keep Destroying Value? Part I.

IACCM – Ask The Expert

January 14, 2016

Anne M. Kohler, EVP & COO

Dalip K. Raheja, President & CEO

© 2016 The Mpower Group, Inc. All Rights Reserved.

Unauthorized Duplication, Storage or Transmission Strictly Prohibited.

Agenda

2

Importance of Relationships

From Theory X / Y to Theory Z

Redefining the End Game

What Needs to Change


Unauthorized Duplication, Storage or Transmission Strictly Prohibited. 3


“Poor Supplier Relations Costing U.S. Automakers Millions”

Rating is highly correlated to benefits provided by suppliers –

first to see new technology, best personnel for support, best pricing, etc.

Just One Example




“Poor Supplier Relations Costing U.S. Automakers Millions”

Study conducted by John W. Henke Jr., PHD

from Planning Perspectives, Inc.

What is the Cost to the Suppliers?



Business Models are Changing . . . . . .


. . . .and dependence on trading partners is higher than ever

Globalization

Desire to enter new markets

Suppliers drive revenue

Customers drive cost

Innovation is key

Internet Of Things is here




What do these Companies have in common?

6

These companies excel BECAUSE they excel at Trading Relationships



Just How Valuable are Trading Partner relationships?

17

8.5

02468

1012141618

S.A N.S.A

ROI17.2

10.110.3

02468

1012141618

25 Most

Active

25 Least

Active

Fortune

500

ROE

Percent ROI Impact for Top 2000 global companies Alliance impact on Percent Return on

Equity for Fortune 500

21 14

02468

10121416182022

Highly

Successful

Less Successful

20

11

02468

101214161820

Successful Less Successful

Revenue generation a Percent of

overall firm sales

Percent Profitability Improvement

Source: Booz Allen Hamilton


7



How Valuable are Trading Partner relationships today?

Source: Booz Allen Hamilton


8

Supply chain cost reduced by as much as 20%

Revenues increased by as much as 17%

On-time delivery increased by as much as 27% overall

Inventory levels reduced by as much as 50%

Inventory turns doubled

Stock outs reduced nine-fold

These downstream indicators are directly related to trading relationships



Extract Additional Value

Time

Pricing Negotiation Value


9



The Only Value that increases over time is Relationship Value

Pricing Negotiation Value

Relationship Value

Time


10



Agenda

11







Assumptions We Make about People Drive our Behavior

From Theory X / Y to Z

12

This BECOMES a self-fulfilling prophecy

* Professor Douglas McGregor’s XY Theory

States that employees:

• Are inherently lazy

• Will avoid responsibility if they can

• Need to be closely supervised

• Need comprehensive systems of control


• Find work to be a source of satisfaction

• Are self-motivated

• Seek responsibility or are willing to accept it

• Their full potential is not tapped in most organizations



Theory Z


13


• Are motivated by long-term employment (commitment)

• Like collective decision making (collaboration)

• Have a moral obligation to work hard

• Like individual responsibility

• Like evaluation and promotion

• Like holistic concern for them as employees

If we change our assumptions and behaviors toward our trading partners might that

change our results? Can you say Toyota? Honda?

* Developed by Professor Ouichi at

University of California



The supplier holds the

cards after the contract so

I need to get what I can

into the contract

The supplier will

try to get all the

money out of me

that he can

If I tell the supplier

about the decision

process, he’ll try

to work around it

The only thing the

supplier won’t

exaggerate is price

The supplier will

not tell me any

cost driver

information

14

Common Buyer Behaviors – Theory X

Buyers Think . . . .

Does this Sound Familiar?




Common Seller Behaviors – Theory X

Customer will beat me

down in negotiations, so I

will start high to have

room to maneuver

Some

requirements will

be hidden so I

need to assume

risk in my pricing

Customer will take

advantage of any

information I share

Customer will talk

about quality, but

I’ll win on price

Customer wants

absolute lowest

price, doesn’t care

if I make a profit

15

Does this Sound Familiar?

Sellers Think . . . .




Poll

Do the buyer and seller behaviors we

described sound familiar?

Yes or No



Theory Y -

Cooperative

Relationship

Theory X -

Uneven

Relationship

Hierarchical

Power

Siloed

Competitive

Exclusive

Command/control

Independence

Low morale

Poor behavior

NIMBY

Holistic

Empowered

Cross-functional

Cooperative

Shared

Involving

Interdependence

Higher morale

Respect for some

Good practice sharing

Moving from Theory X to Theory Y to Theory Z

17


Is moving to Theory Y going far enough?

Theory Z –

Collaborative

Relationship

Integrated

Empowered

Cross-company

Collaborative

Inclusive

Involving

Interdependent

High morale

Respect for all

Next practice sharing



Poor Relationships - Long Term Value is Not Generated

Reduction in Value Realization

18

Buyer

• Longer buying cycles

• Grudging vs. willing

cooperation from supplier

• Loss of supplier focus

• Unreliable support /

increased response times

• Loss of trust

• Loss of referral business

• Loss of repeat business

• Reduced purchase volumes

• Increased cost of bid / longer

sales cycles

• Loss of buyer focus

• Loss of trust

Seller




Start with the end game in mind

19

Objectives for Both Sides:

Increased savings/revenues

Incremental value opportunities

Reduction in buying/selling cycles

Better trust

Focus on relationship as core value

Long term view




Agenda

20







Traditional Buying & Selling Process

• End point is not the contract

• Buyer loses leverage once contract is signed

• Value is exchanged after the contract

21

Redefining the Endpoint

Step1

Step2

Step 3

Step4

Define

Requirements &

Relationship

Supplier

SelectionContract

RM -

Value

Generation

Commercial

professionals have

misidentified the

endpoint

The

pre-nuptial



The Real End Point

With real end point in mind…

– Contract is an intermediate step, not the goal

– Everyone acts differently throughout entire process:

1. Defining requirements & relationships

2. Partner selection

3. Negotiations and contract

4. Ongoing Relationship Management

22

Redefining the Endpoint

Step1

Define

Requirements &

Relationship

Supplier

SelectionContract

RM -

Value

Generation

Incremental

Value

Creation-

The Marriage

Step2

Step4

Step3



SEE SAW CHART

Contract

What Buyers traditionally do…

Buy-side leverage Sell-side leverage

• The goal is to keep the end in mind and achieve a balance

• The way to achieve this is to think about “mutuality of

interest” before and after the contract is signed

• Once the contract is signed, the seller will do what it has to do to

make himself whole

• Seller is more interested in avoiding negative contract

consequences than in contributing to long term value creation

• Exercise their leverage up to signing the contract

– Pressure sellers

– Focus is to obtain best deal

– Push risk onto the seller

• Pay less attention to value creation after the contract

“Mutuality of Interest” – Manage activities essential to capturing the promised

“Mutual” benefits and to identify additional “Mutual” benefits of a partnership

between a supplier and a buyer organization.

What Sellers do…The Goal – “Mutuality of Interest”

23



Agenda

24







Change the Faulty Assumptions of Buyers and Sellers

to create Mutual Value with your Trading Partners!

• Focus on the relationship

as the core value

• Create incremental value

opportunities

• Increase savings/revenues

• Reduction in

buying/selling cycle


Theory Z

25



Role of the commercial

professional

The context under which

they work – Theory Z

New required

competencies

New approach and

process


26




Change your Thinking

Make your Commercial organization a competitive weapon by

collaborating with your trading partners – Theory Z

Better

Relationships

=

Increased

Value

27



Role of the commercial

professional

The context under which

they work – Theory Z

New required

Competencies

New approach and

process


Learn more by joining us on February 18th for Part II -

“How to Build High Value Relationships Under Theory Z”

28



THANK YOU FOR ATTENDING!

29

By

Anne Kohler

EVP and COO

The Mpower Group

(630) 268-8963

www.thempowergroup.com

http://blog.thempowergroup.com

http://www.thempowergroup.com/

http://blog.thempowergroup.com/