Strategic Contracts: InsightVersus Oversight Governance

(Editor’s Note: Inside Supply Management^® Weekly recently published “Implementing a Successful Supplier Sourcing Contract,” which highlighted why strategic supplier relationships should use all of the tools in the contracting toolkit. This article is the seventh in a series that explores each of the 10 elements that craft successful buyer-supplier contracts, as described in the book The Vested Outsourcing Manual. This article discusses Rule 5, Element 7 — Relationship Management.)

By Kate Vitasek

Following the first four Vested rules helps the parties reach a collaborative, win-win agreement. But keeping the agreement aligned and smoothly operating hinges on Rule 5, which creates a sound governance structure based on insight, not oversight.

The main thing to keep in mind is managing the business with the supplier — not simply managing the supplier. Getting it right will help the parties avoid such issues as the outsourcing paradox and activity trap, discussed in previous articles.

There are four essential components to a sound governance structure, starting with relationship management.

Element 7 focuses on establishing joint policies and mechanisms for flexibly and collaboratively managing the relationship and business. It also establishes protocols for how the parties will address changes in the key components of the agreement.

It’s essential that companies realize the importance of managing Vested relationships with the same level of intensity as their customer and employee relationships. Skimping on governance leads to an agreement that is out of equilibrium. These six techniques can be used to align management of the relationship:

1) Create a tiered management structure. Establish an organizational structure to ensure vertical alignment between executives and employees.

2) Establish separate service-delivery, transformation and commercial-management roles.

3) Establish peer-to-peer communications protocols. Once the parties have determined a tiered structure and established functional roles within it, they should focus on horizontal integration. One way to do this is to map individuals into the structure using a peer-to-peer alignment approach, commonly known as a reverse bow tie.

4) Establish a communications cadence, tempo or rhythm. A regular communications cadence process sets the rhythm of the business by helping parties establish a formal mechanism for managing it.

5) Develop a process to maintain continuity of resources. Address common concerns through a personnel-management component. A good tool is a key-personnel clause in your agreement that ensures the “A” team is staffed on the relationship. Typical key-personnel clauses are for 18 months to 3 years and are essential for getting a new relationship running successfully. Key personnel should be bilateral and not required only from the supplier.

6) Establish a performance-management program to govern the day-to-day business and relationship. Such a program measures end-to-end performance against KPIs and desired outcomes while encouraging proactive problem-solving and dispute resolution.

The final articles in this series cover the other three elements of Vested Rule 5 — establish an insight, rather than oversight, governance structure. Up next is Element 8 — implementing transformation management.

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.