The pandemic-related disruptions of supply chains around the world have painfully brought to light flawed supplier relationships. They have made it abundantly clear that trust between companies and their suppliers is integral to building a resilient supply chain.
But how do firms work to develop and maintain trust? And, if trust has been reduced, is it possible to change course and create a better relationship? Recent research answers these questions and provides practical guidance that can help trading partners increase the level of trust in their relationships.
Imagine a strategic business relationship with little trust between a buyer and supplier. It may spark the buying organization to micromanage the supplier or put in safeguards such as requiring extra quality checks, adding buffer stock to inventory, and imposing penalties for poor performance.
But low trust in a business relationship is a two-way street. Unhappy suppliers don’t like to be micromanaged. When that happens, the supplier’s account management team may become frustrated. The supplier’s chief financial officer may mandate that a 15% “pain in the ass factor” be added to the client’s pricing, and the supplier’s account executive responsible for the account may find himself struggling as team members leave to work on better accounts.
These behaviors significantly increase transaction costs associated with doing business and almost always prevent the organizations from wanting to collaborate to solve more strategic challenges.
A Method for Measuring Trust
But trust is a fuzzy thing. How do you measure the level of trust in relationships? This question led the three of us to develop an assessment tool, which measures the health of the trading partner relationship and helps the two parties understand how their actions and behaviors may inhibit trust in the relationship.
As part of our research, we performed 129 assessments across 98 unique trading partner relationships in more than two dozen industries. On average, the assessments were done 1.7 years into the trading partners’ existing contract and had an average annual contract value of $94 million. In many cases, the trading partners had been working under previous contracts and were looking to create more strategic relationships requiring a higher degree of trust. Fifteen of the relationships allowed us to do follow-up assessments, which gave us valuable insights into how to turn a low-trust relationship into a high-performing partnership.
Our tool for assessing partners’ compatibility and trust (C&T) measures five key relational components that contribute to a healthy and trusting relationship.
- Focus is the ability to combine individual roles into a corporate direction to benefit all stakeholders. There is a common purpose and direction and clarity around that direction.
- Communication is the efficient and effective transfer of meaning through words and actions to achieve and grow mutually beneficial outcomes. It includes open and timely sharing of information that a partner needs to make decisions.
- Team orientation is the ability to focus and direct individual goals and objectives into a cohesive group strategy. Team orientation is a key indicator of how well trading partners work together.
- Innovation is an organization’s ability to dynamically deal with change and its tolerance for risk and trying out new ideas and solutions. Strong and trusting relationships allow the parties to share risks and rewards, invest in each other’s capabilities, and collaborate to achieve common goals.
- Performance trust is the consistency in performing as promised — i.e., meeting commitments.
For each component, the buyers and suppliers score both their view of themselves and their perception of their partner. A key goal is to identify gaps that highlight areas contributing to misalignment and distrust. Once the gaps are identified, the trading partners can begin the work of closing the gaps.
The research reveals three lessons organizations can use to improve their relationship health.
1. Trust starts with cultural fit.
In our research for Vested: How P&G, McDonald’s and Microsoft are Redefining Winning in Business Relationships, a book two of us (Kate and Karl) coauthored with Jeanne Kling, executives at Procter & Gamble attributed cultural fit with suppliers as a critical success factor. Cultural fit in a trading partner relationship can be summed up as having similar perspectives on how organizations work, communicate, and make decisions. Our C&T assessment method allows business partners to gauge their cultural fit across the five dimensions.
One example of a cultural fit mismatch we came across concerned a medical device company and a supplier to which it had outsourced facilities management. The medical device company’s operating culture valued flexibility and innovation while the supplier’s culture was hierarchical and process oriented. Realizing this, the parties amicably agreed the supplier would not participate in an upcoming competitive bid process. The parties also agreed on a fair way to compensate the supplier for helping support a smooth transition to the next supplier.
2. Your business model matters.
When organizations procure goods and services, they have a choice of sourcing business models, ranging from highly transactional (buying goods with a simple purchase order) to highly strategic contracts based on achieving ambitious business outcomes such as increasing speed to market and innovating to meet the United Nation’s Sustainable Development Goals (SDGs) for responsible production.
Our research using C&T assessments shows that an organization’s choice of sourcing business model can have a positive impact on trust. Take a pharmaceutical company that had outsourced its facilities management to a supplier for almost 25 years. In 2015 the parties were operating under a performance-based sourcing business model, which puts risk on the supplier to guarantee cost savings and performance levels. While savings and performance targets were being met, the pharmaceutical company was irritated with the supplier’s lack of innovation. Likewise, the supplier was frustrated because its profits suffered every time it performed work outside the scope of the contract. Here C&T assessment revealed the parties had a good cultural fit but the contract itself was pitting the parties against each other in a classic win-lose situation.
In 2017 they decided to try a new approach to contracting that used a vested sourcing model, which combines a formal relational contract with an outcome-based economic model. (It’s called “vested” because the parties have a vested interest in each other’s success.) Now the parties share risk and reward for delivering mutually defined desired outcomes. The results are significant after the parties changed their business model — both in terms of results and increased trust. The supplier delivered 48 transformation initiatives and nearly 250 standardization projects, resulting in double-digit cost savings and earning incentives that yielded higher profits. Trust also increased, rising 22% by 2019. Their relationship health continues to climb and by 2021 had risen by 35%.
3. Increasing trust is a strategic choice.
Can you take a broken and distrustful business relationship and turn it into a healthy relationship? Or can you take a good relationship and make it great by increasing trust? The answer to both is a resounding yes. But doing so doesn’t just happen; it is a strategic choice supported by conscious behavioral changes.
In all the organizations we studied the need for change served as a catalyst for improving relationship health. The C&T assessment helps trading partners take the vague concept of trust and provides a quantitative measurement of their relationship health. Equally important, the assessment highlights gaps where not-so-trustful behaviors are creating friction.
Such was the case for Vancouver Island Health Authority and South Island Health, a group of doctors who were operating under a labor services agreement for providing hospitalist services to the authority. When a lack of trust stalled contract negotiations, the parties turned to a neutral review of their relationship that included using an assessment. It provided tangible guidance on what was causing their trust issues and helped the parties realize they both wanted a better fit.
They made a conscious choice to turn their troubled relationship into a trusting and collaborative relationship. Their efforts led to an increase in their C&T Index from .48 to .71 in just two years. Along with increased trust came increased business results such as achieving cost-containment goals and developing innovative solutions such as the Hospitalist-at-Home program.
The results are real.
Our research can be summed up with a simple equation: trust = happiness (in terms of lower costs, improved performance, innovation and even a general feeling of positivity and happiness at work).
The C&T assessment quantifies happiness by asking trading partners to provide adjectives describing their relationship. For example, Vancouver Island Health Authority’s and South Island Health’s baseline assessment used words like distrustful, broken, strained, untrusting, adversarial, toxic, and suspicious. In a follow-up C&T assessment two years later, team members described the relationship as collaborative, respectful, trusting, supportive and, yes, even happy. Just how happy? A comparison showed a drastic turnaround with the percentage of adjectives shifting from 84.5% negative to 86.2% positive.
The bottom line? To increase trust with your trading partners, start by looking at cultural fit and selecting the appropriate sourcing business model. And don’t underestimate the power of making a strategic choice to consciously build trust.