Accountancy researcher’s new paper reveals a better way for companies to negotiate with outside vendors
The traditional way most companies negotiate a deal with an outside partner or supplier is by drawing up a contract that outlines what is expected from each party, and specifies rewards and penalties linked to performance.
But that’s an outdated practice, said F. Asis Martinez-Jerez, especially in fast-changing, emerging markets where companies need the ability to be nimble and flexible to stay competitive. The assistant accountancy professor, who studies issues related to accounting information and control systems to implement customer-centric strategies, explained why the old standard is less than effective in his paper, “Rewriting the Playbook for Corporate Partnerships.” The paper was published in the winter issue of the MIT Sloan Management Review.
Martinez-Jerez studied large telecom providers in India, retail chains in Europe and global software firms. He found their approach to negotiation is fundamentally redefining the parameters of strategic partnerships as we know them. These companies are taking calculated risks, such as letting their vendors have more management responsibility, giving them access to what used to be privileged information and incentivizing them through profit-sharing.
Martinez-Jerez calls this negotiation strategy “adaptive strategic partnerships,” and he sees a potential for this recast perspective to reshape how companies around the world do business with their vendors.
The researcher first became interested in the topic of negotiations while studying partnerships between corporations and their suppliers.
Bharti Airtel — a telecommunications service company head- quartered in New Delhi, India, that is currently the world’s third largest wireless telecom service provider — is a prime example of adaptive strategic partnerships. In 2004, the company was trying to manage the expansion of India’s wireless and telecom market while facing fierce competition from broadband and telephone landline customers. It took Bharti so long to hammer out and update existing contracts with its vendors that it was at risk of losing its competitive edge.
The only way the company could both satisfy customers and outsmart the competition was by negotiating some “unconventional relationships” with top telecom equipment vendors, including Ericsson and Nokia as well as software giant IBM.
In the past, when Bharti needed to expand its network foot- print in the wireless market, it would purchase extra equipment such as exchanges and cellular antennas, and pay its vendors to run the network.
The problem with that approach? It resulted in unused capacity and more rush orders.
Instead, Bharti decided to “rethink the approach to network capacity,” Martinez-Jerez said. It paid its top vendors to actually operate their network, compensated them based on actual equipment usage and let them take charge of network performance and troubleshooting.
It also gave its vendors privileged information they wouldn’t normally have access to, such as demand forecasts and expansion plans, and somewhat free rein in performing their responsibilities.
“These relationships require investment and trust,” he said. “It means exposing yourself to risks.”
It’s a risk that has paid huge dividends for Bharti, who as a result, was able to devote more time and planning to developing relationships with the company’s customers. The company has seen its total customer base grow at an annual rate of more than 35 percent between 2004 and 2013, Martinez-Jerez said, noting that much of that growth can be directly attributed to how Bharti has structured those partnerships with key vendors.
These adaptive corporate partnerships are applicable to most businesses, but tend to work best under certain conditions, Martinez-Jerez said. For example, the product or service in question must be of strategic importance to the customer, the vendor needs to have expertise in the industry and both parties must be willing to adjust as the relationship evolves.
Ideally, the partnership should incentivize both the company and vendor to work together so that there is a feeling of ownership on both sides.
For example, Bharti has taken the unusual step of providing IBM with a percentage of its revenues via a revenue-sharing agreement. This has given IBM “a vested stake in the outcome of its own innovations,” said Martinez-Jerez, while at the same time built a culture of trust between the companies.
Infosys, India’s second largest software firm, also employs the adaptive strategic partnership model. For example, in its work with a U.S. retailer, Infosys now focuses most of its attention on how many out-of-stock items there are at the client’s stores, rather than tracking down glitches in the company’s stock-replenishment software.
“That metric is far more important to the retailer,” Martinez-Jerez said.
Carrefour, a French retail chain, rethought its approach with its suppliers a few years ago, when executives realized that the way they purchased items — by setting an annual list price and negotiating individual promotions with their manufacturers — was creating “an adversarial dynamic,” Martinez-Jerez said.
Today, Carrefour assigns a “category captain” in each product category who has access to sales information and determines which products Carrefour will carry, as well as where they’ll be placed in the store. In exchange, the suppliers agree to meet an annual target for the total margin generated in their division.
Companies that want to be forward thinking and innovative need to consider these types of partnerships as options for the future, Martinez-Jerez said. Ultimately, it is the CEOs and top leadership who need to embrace this unconventional business philosophy and push it as a strategy.
“The CEO has to have this in mind, because if it’s not supported from the top leadership, it obviously doesn’t work,” he said. “Usually the way I’ve seen companies arrive to the decision to jump is by hitting the limits of their current strategies. They’re under strategic stress and they need to break with the traditional molds.”