A clear line of sight between the supplier contract, performance and relationship

By Alan Day, chairman and founder at State of Flux
Picture this, you are preparing for your next monthly supplier meeting and, although the latest performance data shows they have been hitting targets and they think they are doing a good job, the underlying belief in your organisation is that they are not performing well. How do you get beyond opinion to quantify this and gather the information you need to make a well informed and fact based decision about the future of the relationship?
We think that there needs to be a clear line of sight between what is in the contract (and the contractual obligations of both parties), the performance metrics or KPIs, and the relationship, including a 360-degree view or ‘perception’ of the relationship. However in practice this is rarely the case.
Over the last five years our global studies on leading  supplier relationship management (SRM) practice has revealed that many organisations still lack a strong foundation upon which to build their SRM programme. Such a foundation will incorporate three key elements; contracts management, risk management and supplier performance management
The best way to achieve a ‘clear line of sight’ is to use technology which enables operational teams to view contractual obligations with suppliers, create KPIs to reflect these and tie this back into the overall view of the relationship. Being able to view all aspects at once, and over a period of time, is a powerful tool and provides invaluable insight to all aspects of the supplier/customer relationship.
Unfortunately, our research has also shown that the adoption of technology has consistently lagged the other five ‘pillars of SRM’. The six pillars, which we use as a framework for our SRM programmes, are:  business drivers & value, stakeholder engagement, governance & process, people & skills, tools & systems, and relationship development & culture. Our research has shown that in order to have a strong SRM programme, organisations need to be strong on all six of the SRM pillars.
Most people will acknowledge that trust is key to successful SRM and we would not disagree. Developing trust between both organisations must be built up overtime and requires both parties to display the right behaviours, share information and communicate effectively. 
It remains true that many organisations struggle with achieving the necessary behavioural change to start building better trust with their suppliers and change internal attitudes. State of Flux is seeing increased evidence that the implementation of systems to capture, collate and manage the relationship is acting as a catalyst to bring about the required changes in behaviour, supporting the argument to implement the technology in the early stages of SRM. “Over the years we have found using technology is a great catalyst for invoking change and SRM requires quite a behaviour shift” Tim Richardson Head of Procurement British Airways.
Whilst it is counter to conventional thinking to invest systems early in the programme, we have seen a number of benefits from a technology led approach to implementing SRM:
  1. Provides a clear and tangible focal point for the SRM programme
  2. Ensures SRM is definable (it no longer depends on individual stakeholders’ perception of SRM, for example  ‘more golf games’ or ‘tighter KPIs)
  3. Provides structure; giving the SRM lead the ability to use the system as a framework to ensure activities are being carried out, leaving the SRM team to focus on relationship development and coaching the business and respective suppliers on how best to work together
  4. Drives consistency on how suppliers are being measured, managed and treated (and a consistent ‘supplier experience’)
  5. Progress in SRM can  be tangibly measured both at a supplier level and programme level
  6. Gives a clear line of sight between contract, risk, performance and relationship
In practice, most users of SRM technology would be the operational owners of the supplier relationship (that is, those out in the ‘business’). So procurement’s role should be to own the technology (and the processes and governance models) but it does not need to own the relationship with the supplier. In simple terms, procurement is best placed to provide the operational users with a framework for how the supplier should be managed, but the day-to-day management remains the responsibility of the business.
Clearly not all suppliers warrant an SRM programme or even a performance management programme. Effort should be prioritised through supplier segmentation and a scalable approach needs to be adopted as illustrated in the following graphic:
Despite these benefits our research suggests that there are a number of barriers preventing the adoption of technology to support supplier management:
  1. Organisations are still struggling with supplier segmentation and have yet to develop treatment strategies for each of the segments, as well as the supporting technology requirements.
  2. Difficulty linking the contract to the actual performance and the relationship for suppliers. Often the contract management system is not populated or kept up to date.  KPIs might not reflect what is in the contract.  Relationships may have developed over time and therefore lost the focus on the performance and contract related information.
  3. The location of the contract management system is often an issue. Many organisations still link the system to Purchase2Pay, ERP or eSourcing.  We believe it should be linked to SRM and SPM systems as it is the operational users who need this visibility.
  4. Training on the value of linking contract, risk, performance and relationship management has not taken place.
  5. Confusion on the use of performance management (mostly ‘hard’ metrics) versus perception/360º feedback (mostly ‘soft’ attributes).
In procurement we put most of our effort, resource and technology into a buying process that may take three to six months - often forgetting that the consequence of that decision may last three to six years or even longer.  If this is not well managed it will result in many of the upfront sourcing efforts being eroded.  In order to capture and increase value, we think the time is right to look at the allocation of resource and technology and get the balance more aligned towards post contract signature activity.
Here are some basic questions to test whether your organisation has a good foundation for your key supplier management initiatives:
  • Can you put your hands on the company’s top 100 contracts?
  • Are the contracts tiered to reflect the different supplier segmentations?
  • Are there clear KPIs that link back to these contracts (are these mutual or two way KPIs)?
  • Is there a 360-degree feedback programme in place and is it consistent across your organisation? Is it rigorously applied?
  • Is there a governance model that defines and links operational, commercial and strategic activities?
  • Do you proactively manage supplier risks and innovations?
If you would like to know more about State of Flux’s awarding-winning* solutions for managing supplier contracts, performance and relationships, please contact us on +44(0) 207 842 0600 or email us at enquiries@stateofflux.co.uk for a demo. 
*Awarded a prestigious Gartner Cool Vendor status for our market-leading technology in 2012.