By: Jeanette Nyden, Co-author of Getting to We: Negotiating Agreements for Highly Collaborative Relationships
There are certain types of business relationships that will foster sustainability, and there are those that won’t. Businesses wanting seriously to develop sustainable sourcing (a diverse, productive, long-lasting and financially viable supply chain) must establish collaborative relationships with their supply chain partners.
Collaborative relationships have the ability to become sustainable because they address some of the fundamental problems with business relationships: Trust, transaction costs and fluctuations in the market. Collaborative partnerships address these issues by establishing the relationship’s foundation on a set of common social norms. The nature of the relationship itself, therefore, fosters trust, which reduces costs, and can also address changes in the market.
This perspective that the relationship—and not the transaction—is at the heart of sustainability is very important.
It should also be recognized that not every relationship is appropriate for collaboration. Those relationships that are appropriate for collaboration may need to take several steps to prepare for the rigor that comes with collaboration.
Social Norms To Do Business By
The key to successful collaborative business relationships lies in negotiating the relationship based on a set of fundamental social norms or principles. These norms are the same ones that govern successful societies. Once business people accept this precept, collaborative relationships will flourish.
In the book Getting to We: Negotiating Agreements for Highly Collaborative Relationships, six social norms, referred to as guiding principles, are described that serve as the foundation for collaborative relationships. They are reciprocity, autonomy, honesty, equity, loyalty and integrity. These principles, so important in our personal endeavors and interactions, also drive collaborative business behaviors and sustainable business partnerships.
These principles guide the behaviors of individuals and organizations to help them make the right decisions when potential conflicts or questions arise.
Reciprocity obligates business people to make fair and balanced exchanges. If one company accepts a business risk, the other must be prepared to do the same. If one company commits to invest time and money in an important project, the other must be prepared to reciprocate. They decide what is fair and balanced through the negotiation conversation and by applying the rest of the guiding principles.
Autonomy means abstaining from using power to promote one party’s self-interest at the expense of the other. At the individual level, autonomy refers to the ability to act based on reasons and motives reflecting the individual’s own values and convictions. The same applies to business relationships. Businesses want to make their own decisions, free from the power of another; they want to work as equals and they want to be part of a process that allows them to make decisions in sync with each other.
Healthy relationships require honesty as the only policy with accuracy and authenticity as the cornerstones. Accurate or fact-based conversations separate the facts from the explanations that interpret or color those facts. A fact is something that is observable. An explanation accounts for the fact.
Authentic conversations take accurate conversations to the next level and leverage multiple points of view to gain new insights and opportunities for improvement, growth, or change. When conversations are authentic, each person’s point of view is genuine while that person also recognizes that an individual point of view is not the whole story.
Loyalty obliges both companies to be loyal to the relationship. Loyalty to the relationship will come when both companies’ interests are treated as equally important. Loyalty is not being loyal under all circumstances to one company. It is not about sticking together no matter what. Loyalty is about loyalty to the relationship as a single entity.
Equity has two equally important components: proportionality and remedies. Proportionality means one company may get a larger distribution of rewards (remedy) than the other to compensate that company for taking greater risks or making investments (proportionality). An equitable remedy allows the companies to come to a fair resolution when the contract itself may otherwise limit the result or be silent on the matter. For example, the contract might inadequately address the service provider’s performance requirements during a catastrophic natural disaster, such as a Category 4 hurricane. Any resulting ambiguity should be discussed with the principle of equity in mind.
Simply stated, integrity means consistency in decision-making and in actions. Intuitively, people understand this principle. People want to be able to rely on each other and know that they will get the same result from the same set of actions.
To ensure a constant state of collaboration each company is responsible for always following the principles. For example, if both companies take seriously the principles of loyalty and integrity, they will look out for and strive to preserve the relationship. That means that buying companies do not disingenuously threaten suppliers with re-bidding work, and suppliers do not sell the “A” team just to substitute the less expensive “C” team to make a hefty profit.
Transactional relationships that are not premised on the guiding principles often have lower levels of trust, higher transaction costs and more rigid contractual structures in place. These factors, among others, can inhibit sustainability efforts.
Addressing Common Business Relationship Concerns
Trust Ensures Productive Collaboration
Trust is the core quality of any collaborative partnership. Companies with high degrees of trust can spend their energies leveraging each other’s core strengths and creating value, rather than on compliance, enforcement, or worse, fighting metaphorical fires as a result of poor performance.
First and foremost, to trust or not is a choice. Individuals choose to trust each other and act in a trustworthy manner or not. It is that simple. It is also a choice to expect that partners will act in the best interests of the partnership.
Studies show the importance of trust for economic growth. The absence of trust adds to the cost of doing business. Think back to a recent interaction with an untrustworthy person. A certain amount of what is done before, during, and after that interaction is likely directed at ensuring that there is no deception by the other person. This activity is wasteful, as it does not directly create value for anyone.
Lowered Transaction Costs Increase Profitability
When companies trust each other, they ensure that the benefits of cooperation (staying in the relationship) exceed the benefits of going to the market to get a better deal (for example, issues a competitive RFP). The cost to go to market to get a better deal—referred to as bargaining costs—is one facet of transaction costs. Reducing bargaining costs frees up much needed time and money, which can be re-invested by both companies to achieve shared goals for the relationship.
Most companies strive for flexibility but often contract for rigidity. This is a paradox. Rigid contracts prevent the agility demanded by today’s markets. Think about it this way: most contracts have very rigid descriptions of work and penalties for poor performance forcing suppliers to perform to very narrow specifications. Any change in the market entails re-negotiation. And, unfortunately, many business people dread the thought of opening contract negotiations until the contract is up for renewal. Postponing much needed changes to the relationship can cause companies to miss opportunities in the market, or worse to waste time and money.
Collaborative relationships move away from rigidity and place their focus on managing the relationship. A sound relationship management structure provides a set of cohesive policies, processes, and decision-making rights that encourage parties to continuously collaborate. Think of these as mechanisms that when in operation will help keep the relationship running at peak performance long after the companies have signed their deal.
This form of relationship management provides both companies with the flexibility they need to change the scope of work, change performance metrics and even change the pricing model.
Research from a variety of disciplines has shown that collaborative business relationships provide greater financial returns, greater stability, are longer in duration and solve conflicts easily and fairly. All of which lead to greater sustainability. The following examples prove this point in a variety of industries.
Businesses That Have Succeeded At Collaboration
In a fascinating and highly influential study, Robert Elicksson Walter E. Meyer Professor of Property and Urban Law at Yale Law School, set out learn whether legal rules affects the behavior of the people subjected to the rules.
Equipped with theories on law and order, Elicksson traveled to Shasta County in California to study cattle ranchers. Elicksson wanted to understand how the ranchers dealt with situations such as when the cattle of one neighbor damaged the property of another, how they allocated costs for building fences, and how they settled disputes about motor vehicle accidents involving cattle.
Elicksson found the ranchers lived by a set of informal social norms. These norms allowed them to negotiate disputes and cooperate in a manner that not only produced order but which in fact produced a welfare maximizing outcome for everyone involved.
When Elicksson expanded the study, he found the same phenomenon in other social groups, from whalers in the 19th century to business people in the U.S. in the 1960s. An important point of Elicksson’s research was that it was by cooperating under a set of social norms and not by using the power of state sanctioned legal rules that the ranchers were able reach optimized ways to work together.
Professor Robert Putnam, Peter and Isabel Malkin Professor of Public Policy at Harvard, is one of the many researchers who have made the connection between collaboration and economic prosperity. Putnam studied what he refers to as social capital – norms and social networks that exist to enable cooperation and mutual benefit.
The American sociologist Brian Uzzi, Richard L. Thomas Distinguished Professor of Leadership at the Kellogg School of Management, Northwestern University, investigated the role of collaboration and its impact on economic performance between better dress apparel firms in the New York apparel economy. Uzzi found a basic difference between what he called arms-length ties and embedded ties between firms.
Embedded ties are not purely economic but also encompass the social relationships of the individuals representing the firms. Uzzi described the embedded ties as being characterized by trust, fine-tuned information transfer and joint problem-solving arrangements.
Uzzi’s research found that firms that relied more heavily on embedded ties rather than on arms-length ties indeed were more economically successful. Uzzi measured economic success by comparing the probability of failure (closed business) for firms with arms-length ties and firms with embedded ties. The analysis showed that embeddedness decreased the likelihood of failure by 50%.
Make Incremental Changes To Move Mountains
A word of caution here: relationships like those described above evolve over time. Trust builds, barriers come down, and organizations seek more innovative solutions to persistent problems.
It is wise to make incremental changes thoughtfully. After all, a journey of one thousand miles is taken one step at time. Here are three ways in which companies can take the first step to establish a more collaborative relationship.
Create a Shared Vision
One of the most important driving forces for collaborative relationships is to establish and communicate a shared vision for the relationship. This vision is the compass; it helps keep people focused and on task.
To create a shared vision, bring leaders from both companies in one room, look at each company’s mission statements and co-create the shared vision for the relationship. As the conversation progresses, it may surprise some people that both companies have been working towards similar goals all along.
Live by the guiding principles
Equally important, collaborative relationships live by the set of guiding principles described above which form the ethical framework for the relationship and foster trust.
To establish a set of guiding principles, bring the leaders together and write down what each of the six principles means to the relationship. To live into the principles, be sure to model the behavior associated with each principle. Communicating is not enough. People will do as those around them do, not by what they say.
Look at what you are measuring
Finally, look at the metrics. What is being measured and how is the supplier being incentivized or penalized? The adage “you get what you measure” is so true in business relationships. Metrics drive behaviors. What behaviors does a collaborative relationship strive for?
If you want a sustainable relationship align the relationship’s metrics to something greater than immediate cost savings. For example, a call center service provider aligned its internal metrics to their customer’s internal metrics for customer retention. By doing so, both companies worked collaboratively to retain customers.
Research in sociology, game theory, economics and other social sciences shows that relationships based on trust, reciprocity and other social norms outperform more traditional relationships.
While social scientists have proven time and again that a collaborative approach to working together outperforms a more traditionally transactional approach, organizations still enter into conventional transactions. These same organizations lament the lack of innovation, inflexibility to meet market challenges, unrealized profit potential, and more importantly fail to establish sustainable supply chain relationships.
Many individuals and businesses fail to realize they have a choice between conventional relationships and collaborative relationships to reach their goals. Too often business leaders do what those before them did without evaluating the effectiveness of their choice.
You are equipped with the theory, the examples and ways to make incremental changes. What will you do to pursue your sustainability initiatives?
About the Author: Jeanette Nyden is a recognized thought leader, negotiation expert and an international speaker. She is the author of three books including Getting to We: Negotiating Agreements for Highly Collaborative Relationships. Ms. Nyden can be reached by visiting www.jnyden.com.