Don't treat your employees like suppliers

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KateVitasek_100.jpgThe war for talent is 20 years strong and has changed the way companies recruit and retain talented employees. While great strides have been made in how companies treat employees, many are still in the dark ages when it comes to how they treat their suppliers.

Just how backwards? Well, what would happen if employees were treated like suppliers are every day? This is the question posed by Tennessee University Professor in Supply Chain Management, Kate Vitasek.

Winning the war for talent with suppliers
The "war for talent" was coined by Steven Hankin of McKinsey & Company in 1997 and then popularised in a book with the same title by Ed Michael, Helen Handfield-Jones and Beth Axelrod in 2001. In the book, the authors described not only new human resources processes, but also the need for a new mindset in terms of how companies think about and treat their employees. The premise? Organisations that win the war for talent have a competitive advantage.

Winning the war for talent has proven successful for companies such as GE, The Home Depot, PerkinElmer and Amgen.

So, if having a different mindset and processes for attracting and retaining the best employees works, this logic should also work for recruiting and retaining the best suppliers, right?

The good news is that companies are starting to shift their thinking. For example, a new report by the American Productivity & Quality Center (APQC), Reinventing Supplier Relationship Management, says that about 80% of the organisations that they surveyed have implemented, or are at least moderately likely to implement, supplier relationship management (SRM) in the next two years. In addition, the APQC found that, by an overwhelming number (also 80%), a major benefit of the widespread deployment of SRM results in improved supplier reliability as well as reduced risk.

While there is some good news, the APQC notes that it also comes with some bad news: the vast majority of companies are only scratching the surface when it comes to building true strategic supplier relationships that make the shift from value exchange to value creation. The report says that traditional SRM is falling short and cites the fact that supplier agreements are focused on counter-productive goals. By wide margins, "organisations leverage SRM primarily to manage risk and ensure contract compliance". Rather than leveraging suppliers as sources of innovation, buyers see them as "a risk to mitigate".

Michele Flynn, Executive Chairman, SIREAS, LLC, believes that the key reason is the dogma in old-school procurement processes and thus a wrong mindset: "historically, procurement departments believed (and many still do) that their job was simply to drive costs out of the supply chain, and that suppliers are effectively interchangeable. However, in this day and age, when so much of a company's products and services are produced or delivered with the use of third-party suppliers, attracting and retaining the best suppliers is critical to a company's success".

Getting the mindset: what if employees were treated like suppliers?
Hundreds of executives come through my executive education course on Vested Outsourcing and Collaborative Contracting. To make the point of the importance of getting the right mindset and just how poorly companies perform in applying forward-thinking approaches in procurement, I often use an analogy: what if employees were treated like suppliers are every day?

In short, it would be a bad situation for potential employees, given the typical way suppliers are treated. Here's a bill of particulars to ponder:

A company, naturally, wants the most capable and innovative employees (and suppliers). But if the potential employee was treated like a supplier, the person might never even get an interview. Why? The largest companies likely have efficient bidding software that would automatically do a comparison of candidates based on their answers to questions inputted directly into the software. And, in some cases, the company would have outsourced the process to someone to make the decision for them.

Before someone was hired, the company would go through an extensive, arduous negotiation process ending with a contract document anywhere from 50 to 2 000 pages long, based on the complexity and risk of the particular job.

It gets even worse: let's say you have found the perfect person and their starting salary was $100 000 per year. Based on legal, finance and procurement policies, a company will need to negotiate the following clauses into their employment contract:
- The new employee will have to guarantee that they will sign up for a 3% year-over-year salary reduction (cost savings).
- The employment contract would include a standard 30-day termination-for-convenience clause, where the company can fire the employee 'just because' at any time.
- Every two to three years, the company would 'test the market' to see if it could get a better employee by issuing a formal Request for Proposal (RFP); if you are employed (an incumbent), you'd have to go through the competitive bidding process and risk losing your job to someone else.
- Instead of a job description, the employee would get a Statement of Work (SOW), often quite long, detailed and prescriptive because the company doesn't really trust him/her.
- They would have many service level agreements (SLAs) to deal with. For example, did the employee come to work on time; did he/she take too many breaks?
- For many of the SLAs, the employee is vulnerable to various non-negotiable penalties.
- Because the company does not trust them, it would audit their work randomly.
- The employee would have to sign an intellectual property (IP) agreement stating that the company owned their ideas.
- If and when the company fired the employee, it would have a mandatory exit plan in place requiring the employee to train his/her replacement.
- The employee would have to be part of a new bid process if the company planned to give them more responsibilities.
- The company would make the employee absorb cost-of-living increases in addition to the 3% annual salary reduction.
- The employee would have to carry personal liability insurance for protection against mistakes.

If these points sound like a nightmare scenario for any employee to have to face, they are business as usual for suppliers.

You get what you pay for
The old adage says you get what you pay for. This is definitely true when dealing with suppliers. The problem is that companies are in a catch-22 because when they think of suppliers as a commodity - and they have procurement processes that commoditises suppliers - they get commodities. Using the analogy above, talent would not matter because companies would just be hiring butts in seats to do mindless jobs.

If companies do not change their underlying core procurement processes and mindsets, they will continue to get the same old results as they always have. Or, as Albert Einstein said: "the significant problems we face cannot be solved at the same level of thinking we were at when we created them".

Now, I am not saying that every supplier is strategic and that a company needs to have different procurement and contracting policies for each supplier. What I am saying is that most companies have a small number of highly strategic suppliers that do need to be treated (and contracted with) differently.

Shifting up the sourcing continuum
Flynn - who works with some of the largest companies in the world to structure their corporate real estate service contracts - sums up the problem: "companies 'say' they want a strategic supplier relationship, but, in practice, they utilise old-fashioned buying techniques to select suppliers, structure rigid contracts at fixed prices for complex strategic services and don't invest sufficiently in ongoing governance and supplier relationship management to ensure value is generated within the relationship".

Marisa Brown, the APQC's Senior Principal Research Lead: Supply Chain Management, believes the solution is for companies to challenge the gap between their intent and their practices: "companies should take a hard look at their supplier relationships and make sure they are using appropriate sourcing business models. If they take the time for self-reflection, they will likely see the need to rethink many of those relationships and shift up the sourcing continuum to more value-based models, like performance-based and Vested contracts".

The bottom line?
Conventional buy-sell approaches and contracts are designed to simply exchange value (or worse - extract value). Start improving your bottom line by taking a hard look at your supplier relationships and make the shift to create healthier and more sustainable supplier relationships with your most valued suppliers.

Kate Vitasek is recognised for the Vested® Business Model for Highly-collaborative Relationships. She is the author of six books and a Faculty Member at the University of Tennessee. She can be reached at kvitasek@utk.edu.

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