(Editor’s note: Inside Supply Management® Weekly recently published “Implementing a Successful Supplier Sourcing Contract” that highlighted why strategic supplier relationships need to use every tool in the contracting tool kit. This article is the second in a series that explores each of the 10 elements that craft successful buyer-supplier contracts, as highlighted in the book, The Vested Outsourcing Manual.)
By Kate Vitasek
While the 10 elements are important for all types of sourcing business models, they are essential as companies shift up the sourcing continuum to more strategic supplier relationships such as a Vested outsourcing business model.
The first article of this series described how Vested Rule No. 1 directs companies to focus on outcomes — not transactions — for strategic supplier relationships. Once the business model-mapping analysis is completed, a buyer and supplier should work on the second element of this rule: creating a statement of intent (SOI) for their relationship.
A hallmark of a Vested agreement is a win-win contract based on a what’s-in-it-for-we mindset. Most people who choose to adopt the Vested model have experienced firsthand how what’s-in-it-for-me thinking can cause relationships and commercial agreements to suffer from short-term thinking and opportunism as each party seeks to negotiate the best “deal” for its company. This slippery slope can easily happen using conventional negotiating tactics.
For this reason, parties interested in a more strategic Vested relationship should begin by jointly creating an SOI that outlines and codifies the parties’ stated intentions for their relationship.
An SOI temporarily slows the buying and selling process, but for a very good reason: It enables the parties to agree on the intentions of the relationship, something that is rarely verbalized or documented. When a buyer and supplier align on the intention of their relationship, they lay the foundation for a strong relationship.
A well-designed SOI should include three components:
●Shared vision and purpose. This is the starting point and cornerstone of a Vested agreement.
●Guiding principles, or a common set of relationship or social norms that drive and support collaboration and trust. These include reciprocity, autonomy, honesty, equity, loyalty and integrity.
●Expected intentions on desired behavior. This includes behaviors for how the parties will work together to achieve desired outcomes once the agreement is documented in a written contract. Typical SOI behavior statements overview intended behaviors such as communication, perspective, trust and confidence, flexibility, focus and feedback.
The SOI is such an important part of a Vested agreement it is included in the actual contract — typically right up front. Developing a formal shared vision sets forth the larger purpose for the buyer and supplier to work together — a purpose that goes well beyond buying and selling commodities.
This example demonstrates that creating a formal shared vision aligns companies toward a common goal and transcends the self-interests of each company.
Principles and Behaviors
The next step is to develop the relationship’s guiding principles and expected behaviors. This is important because “business happens.” If a disruptive event occurs, the parties will have a clear set of behavior guidelines describing how they will align the business relationship if it gets out of sync. These behavioral ground rules are necessary to avoid miscommunication and misalignment while holding each party accountable to good and fair behaviors and decisions.
Developing the SOI is not necessarily easy — corporate cultures and mindsets must evolve from insularity and self-interest to openness, cooperation and collaboration.
Thus, the SOI does not have to be extensive or highly detailed — but it does need to be developed jointly and it should have teeth. A typical SOI is usually less than two pages in length and should be formally embedded into the contract to lay the foundation for a strategic supplier relationship. A well-developed SOI transcends the buyer-seller relationship and sets forth the overarching purpose of the relationship.
The next article in this series moves to Vested Rule No. 2: Focusing on the what, not the how, and exploring how to define work scope for a highly strategic Vested agreement.
Kate Vitasek is an international authority on the Vested business model for highly collaborative relationships. She is the author of six books on the Vested model and a faculty member at the University of Tennessee in Knoxville, Tennessee.