Today digital transformation is the most important motivation for outsourcing. Outsourcing is an interorganisational relationship between a buyer company and one or several providers. In 2012, CIO- Sweden association reported that 70% of companies have outsourced IT and they will continue to do so.
At the beginning of the outsourcing wave between the years 2000 and 2002, the financial reasons were the most important argument for companies to outsource IT. However, the argumentation behind outsourcing has changed. In 2016, an analysis of 1000 outsourcing contracts in the Nordic countries (Sweden, Finland, Norway and Denmark) showed that digital transformation is the most important motivation for outsourcing today. Also, 45% percent of the Swedish companies were intending to outsource more in the future and only 6% were not.
However, sourcing is not always a smooth and fully efficient process. It has its challenges for managers, which require their own considerations.
Trust is a key factor in supplier relationship management
Managers from companies experiencing 3rd and 4th generations of sourcing refer to trust as the most important factor in supplier relationship management.
Although difficult to specify in a contract, trust is clearly a critical element in sourcing success. Trust in supplier relationship management can be defined as the belief that on the word of each party, they will fulfil their promises and obligation as agreed and stipulated in the contract and on time. It is crucial for companies to reach a high degree of trust as a measurement of the quality of the relationship, together with strategies, advice and behavioural patterns.
Organisational culture influences trust between the buyer and supplier
Organisational culture is often blamed by managers when different internal IT projects or sourcing projects fail. Organisational culture can be defined as “the shared patterns, beliefs and values in an organisation that are considered valid by the members, and are considered as the accepted way of behaving, thinking and facing challenges”. Organisational culture varies a great deal from one organisation, company, institution, or group to another and represents those expectations, norms, and goals held in common by members of that group. Organisational culture in a company can influence its general performance, therefore when managing a sourcing relationship, organisational culture of the units involved in the relationship should be considered.
An Organisational culture encouraging trust improves sourcing performance
The idea of trust is connected with the idea of having an open culture. This reveals a crucial point in continuing a successful IT outsourcing relationship. If there is no open culture between buyer and supplier, then any problems that arise may not be expressed and potentially remain hidden. This can negatively impact the outsourcing relationship, as the level of trust can deteriorate over time, with no one knowing exactly why.
Most of the buyers are looking to have control over the relationship with the provider(s). But, at the same time, they want to be able to trust their provider and this is true the other way around too. Organisational culture assessment of both buyer and supplier companies can benefit from communicating their goals to each other, thus improving the supplier relationship. Organisational culture assessment should be done systematically. Third-party organisations, which are experts in sourcing management can support others in assessing organisational culture and providing guidelines to manage supplier relationships. Cultural challenges in sourcing relationships, if any, should be identified and the necessary cultural actions should be applied to deal with the cultural challenges.
Actions pertaining to a change in organisational culture such as communication and innovation workshops need to be planned together with suppliers during different stages of outsourcing. This is to further enforce the trust between buyer and provider and enhance the sourcing relationship and performance.
There are several examples in which the organisational culture aspect was considered to improve the supplier relationship management. One example was the company Cemex, a large American concrete production company. In this company organisational culture was assessed and changing actions were taken in order to improve performance in different IT units. The second example was in SAS, a large Scandinavian airline. In this company organisational culture was addressed to improve the supplier relationship management in a multivendor relationship. They provided an internal handbook of sourcing considering the cultural actions to improve trust between the buyer and providers.
Sofigate has recently assisted a multinational retailer in improving their current buyer/supplier relationships. This has resulted in a staggering cost reduction of 200%, providing the retailer more money to invest in innovation.
Author: Parisa Aasi, Business Technology Senior Analyst at Sofigate.
If you would like to know more about how Sofigate can enhance your existing supplier relationships, send an email to firstname.lastname@example.org.