“Either they get the money, or I keep the money.” This is true. If a buyer pays more for a product or service, the seller keeps the extra. If the buyer pays less, they pocket the difference. It’s that simple. Except that a good buyer/seller relationship can often be more valuable than the purchase price suggests. A book could be written on supplier relationships and has… several times. This is NOT that book, but we can unpack this a little.
A positive trading relationship starts with a solid assessment, on the part of the buyer, of what it makes sense to do in-house and what doesn’t. The relationship should establish a positive value exchange where both firms win when the contract is signed. It should have room for growth for both trading partners. And it needs to recognize that there may be a time when the relationship no longer makes economic sense for buyer, seller or both.
Deciding to buy a product or service assumes that a business has looked at its own core competencies and identified those which lie outside of its economic advantage. Those competencies or functions are prime examples of areas where a business can profitably buy products or services to reduce its own costs or increase the quality of a function without incurring ongoing costs to maintain that capability. A clear, almost universal example is networking. What business would string their own fiber optic cable and establish their own ISP rather than simply buy network services from a seller today? Outside of telecom, utilities and network providers, no one would undertake the expense to do this today. The economic advantage here belongs to communications companies. It wasn’t always this way. In the early years of networking, some firms ran their own cable across town, getting permission from the city and owners of rights of way. The balance of who has the economic advantage changes over time as players and industries come and go. We must periodically assess our own core competencies. An excellent time to do this is during the annual business review or strategic planning cycle by incorporating a SWOT analysis.
Once an assessment results in a decision to buy products or services, a selection must be made, and an agreement reached. This may be a quick process in the case of a low value decision, or it may involve an extended analysis and perhaps even a competitive bidding process for a large or complicated purchase like a large systems project or real estate. It helps during the acquisition process to have the exchange value in mind. This process can be ruled by two emotions; greed and fear. To keep those emotions at bay we need to ensure the process is ruled by rational analysis. Take fear for example; the vendor fears losing the deal and the buyer fears overpaying – or perhaps being unable to buy at all. As a result, a narrow perspective, ruled by the price or cost can set in, blinding trading partners to the value of the deal, which is the economic value of the product or service to the buyer and the economic cost of the product or service to the seller. Further complicating negotiations may be the difficulty in measuring the value of the good or service to the buyer. It may have value that cannot be measured in mere dollars and cents such as certainty or risk avoidance. In the case of insurance for instance, the sleep at night factor cannot be valued, but it is a very real effect of the service. As a buyer we must be careful to measure the total value, economic and otherwise. As a seller we must strive to put the agreement in terms that consider all of the buyers’ benefits – even those they cannot yet appreciate. This is often an area where the buyer can gain tremendous insight by listening carefully, with an open mind to what the seller is saying about value. They can often identify areas that are costing the business money/value that the business is not even aware of due to their relative subject matter advantage.
Many agreements fail to consider the possibility of growth of the trading partners. No business that survives long fails to grow, if not in size of revenue, then in its capabilities. And a wisely crafted agreement has provisions for improvements in scope of offering of the seller and scope of needs of the buyer. Some radical changes cannot be anticipated, and some are obvious. A contract to deliver drinking water can easily anticipate that as the buyer grows, they will need more water as the number of employees increase. This can be priced in with volume breaks or it may be factored in with a clause that says as demand increases, the vendor will provide revised pricing for additional volume. This is where a vendor can shine as well. Best-performing vendors provide feedback to their customers on how they can improve their operations. Often sellers of products or services have a unique perspective and can measure a buyer’s performance against their own history or against a normalized database of the experiences of all of the seller’s customers. This is where a savvy seller can move from being a good supplier to a valued partner that helps buyers to advance their own business capabilities. These are the most valuable trading relationships for both parties, and they lead to long-term, growing, stable relationships.
Finally, arrangements should be made in advance for the dissolution of the relationship between buyer and seller. Both firms will be growing and advancing their own capabilities and it is normally the case that over time, some relationships no longer work. The buyer decides to take on the function formerly purchased from the seller. Or perhaps, the seller grows and is no longer able to profitably service a buyer that has remained small. The specifics vary widely, but the agreement should consider how the firms disengage from one another and continue on their separate ways, parting friends.
If you’re considering the internal vs. external or buy vs. make decision here are some steps to take:
Assess the business strengths and weaknesses answering the question, are there capabilities we can buy more efficiently than we can staff or make them ourselves?
Conduct a selection that considers the overall gravity of the decision. Is this a quick and dirty sort of decision or do we need to be strategic about this?
Put an agreement into place that allows both firms to grow and allows the seller to provide feedback to the buyer about opportunities for advancement.
Decide in advance how to handle dissolution of the relationship so that both firms can part ways whole.