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Sourcing as a tool for innovation?

“No matter who you are, most of the smartest people work for someone else.”
Bill Joy, co-founder of Sun Microsystems

Most companies and organisations invest more in third parties than they spend on their own employees.  No-one disputes the importance of having well-functioning relationship with your suppliers in order to get most out of your investment – but the question is: How? In this short Insight article, we will take a close look into creating supplier relationships that stimulate innovation.

My name is Fredrik Olsson, and I have spent about 20 years in different roles where cooperation between companies has been an essential ingredient for success. Most of the time I have been on the buyer’s side of the table. Once I had a discussion with a major supplier. I asked him: “You work with thousands of clients around the world, but not once have you told us what we can do better. Surely, you must identify opportunities where we can improve, but choose not to express them?” The answer I got was: “No one has ever asked us to do that before!” This exchange provided me with a real revelation: for the relationship to succeed, the buyer must feel allowed to challenge the supplier – and vice versa.

How to foster innovation in a buyer–seller relationship?

There are many creative definitions of innovation, but in this short article we consider innovation to be creating new or improved solutions and methods that bring value, often in terms of increased growth, profitability or cashflow. Regardless of the definition, the combined innovation capabilities of either existing or potential suppliers will by far exceed the existing capabilities in your own company. The challenge lies both in identifying and working with companies that come up with innovative solutions and then in turning these into reality with your existing supplier.

Let’s get back to the original question about “How to create a buyer–seller relationship that fosters innovation?” There is no silver bullet, but there are a few things that you can do to ensure a higher return on every dollar spent on a supplier and to boost the innovativeness of your suppliers:

  1. Make your suppliers feel welcome instead of scaring them away with a rigid process

Traditionally a sourcing process follows a comprehensive framework. The steps in the process most often include defining the needs, issuing a tender in one or several iterations, performing a multivendor evaluation, negotiating and contracting. This kind of process tends to secure the price/performance ratio and it works well for a significant part of the investment. However, it is also a process that very well might cause an innovative start-up to opt out from being your potential supplier. A start-up may not have the resources to invest in a lengthy process with a low likelihood to win.

Therefore, your company must be able to act in a bimodal way. What I mean is that you should adop a more flexible and fast process to support evaluations and explorations of new solutions. A process that supports fast and flexible usage while still maintaining the ethical business compliance procedures needed in sourcing. The sourcing organisation should have the freedom and ability to utilize different approaches, and to be able to switch from one to the other.

  1. Contracts facilitating innovation benefit both parties

You will often hear people referring to a supplier as a partner. However, the term ‘partner’ implies shared interests such as risks and rewards. If you want to think of a supplier as a partner, you also need to secure that the actual contract encourages partnership.

A typical example could be an IT helpdesk service with a charging model where the user is paying a fixed price per call. In that case the real interest of the buyer of the service is to have a problem-free environment that won’t generate any calls – but this interest is totally opposite to that off the supplier of the IT helpdesk function. The likelihood that the helpdesk would use its knowledge and innovation to reduce the number of calls – and thus reduce its own revenue – is low.

A true wish from the buyer is that the total time spent on IT problems should be as minimal as possible. If the contract is written in a way where the supplier also benefits from minimizing e.g. trouble tickets, then the supplier is likely to use its innovation capabilities to eliminate the root causes.

So, a beneficial partnership that encourages innovation should be reflected in the contracts. Such contracts can be difficult and increasingly complex to acquire. Prioritizing focus areas that leave room for innovation is strongly recommended. 

  1. Create a relationship of mutual trust

First, it is obvious that no-one can spend an equal amount of resources and time on each supplier. When segmenting them, you need to consider if, why and how you want to innovate with a specific supplier. The opportunity and need to innovate does not equal the spend or dependency.

For example, with some primary suppliers, you may be able to work in close cooperation and hence be able to innovate together. In some cases, you and your supplier can even innovate together with your customers. With some other suppliers, you may not have similar resources to spend budget- or time-wise so you maintain cooperation at a lower intensity.

Second, be prepared to have open and honest dialogues with your suppliers. You may have to reveal your challenges and future objectives to start accessing their innovation capabilities. Allow the supplier to be truthful to you without having to suffer your judgement (or worse, your punishment!). It is common that buyers use surveys to evaluate the seller, but how often do you invite the sellers to evaluate your company?

Third, innovations will not happen by themselves. You can innovate with the suppliers, but if your internal processes won’t allow the innovations to be realized, you will eventually cause frustration with the suppliers and this will make it harder next time for you to invite them to innovate together.

Remember: incentives drive behaviour

The purpose of incentive models is to drive a desired behaviour. However, if an incentive model is not thought through, it might very well drive a behaviour you don’t want.

For example, most sourcing organizations are primarily rated on their ability to reduce costs and therefore that becomes their primary focus. That is preferred to a large extent, but will an organisation that is fully focused on reducing costs be able to stimulate innovation at the same time? So, a good question to ask yourself is: “Do my current measurements drive or facilitate innovation with suppliers?” Alternative criteria by which sourcing organisations can be assessed are e.g. evaluated solutions, number of products brought to the market, or even revenue.

So, when you decide to invest in third parties rather than internally, make sure you know what you want to achieve. Regardless of what you want to achieve with your suppliers, a proper supplier relationship process, e.g. laid out in the IT standard for Business, will help you to achieve it.