5 principles for great vendor relationships

It’s easy to tell when a vendor relationship is broken. The vendor fails to deliver; it can’t help solve an unexpected problem without more money; it’s expensive; it’s bleeding red on vendor scorecards. The real challenge is figuring out how to fix the problem.

The first step to a solution is to ask the right question: is the vendor interested in a short-term, one-sided (for the vendor’s benefit), transactional relationship or does it want a long-term, mutually beneficial (benefiting both customer and vendor), strategic one? The answer will tell us everything we need to know.

Transactional relationships are for chewing gum

We’re all familiar with transactional relationships. In one of those, if things don’t work out, the customer simply “exits” the relationship and moves on to someone or something else. A good example is the market for chewing gum. If they don’t like a pack, most people simply buy another brand. Writing a letter to the manufacturer is rarely be worth the effort: the paper, envelope and postage cost almost as much as the pack itself.

Transactional relationships are OK in drug stores, in supermarkets and for home repairs. They don’t make sense, however, when the stakes are much higher than candy, tomatoes, or a plumbing job. Companies purchase products and services from vendors to support mission critical tasks, including hardware for data centers, applications for desktop work, telecommunications services, call centers and consulting services. The products and services are expensive and, once implemented, “exit” is costly.

Vendors know this and many of them depend on it to keep a customer’s business when the vendor is failing. They count on the customer’s sunk cost in the relationship, the expense and time involved in switching to another vendor and the uncertainty of working with a new vendor – the “devil you don’t know” – to deter the customer from firing them.

Everyone deserves a strategic relationship

A strategic relationship is the opposite of a transactional one. The customer still has a significant investment in the vendor and switching poses substantial risks and costs. But instead of depending on the threat of “exit” to fix the relationship, the vendor is committed to hearing the customer’s “voice.”

In a strategic relationship, the vendor lives up to the following 5 standards and behaviors.

Problem solving orientation: A good vendor invests in learning the customer’s business drivers and challenges. The vendor focuses not just on its needs but also understands and respects its customer’s requirements.
Value optimization: The vendor delivers robust product functionality, excellent service and world-class price. The vendor’s offering is competitive on every count.
Purposeful flexibility: The vendor accepts fair and reasonable terms – even when they don’t fit the vendor’s sales model. This is a true challenge for many vendors but it’s an absolute must for a strategic relationship. Otherwise, a dissatisfied customer’s only option is “exit.”
Risk sharing: The vendor agrees to terms that ensure risk sharing and accountability, including meaningful financial accountability for concrete results. Risk sharing is essential for ensuring the vendor is as concerned about the customer’s success as the customer is.
Trust: The vendor shows a willingness to discuss difficult issues and put “elephants” on the table. Without open communication, a vendor will never hear a customer’s “voice.”
A strategic relationship demands a lot from the vendor, especially compared to the normal standards of sales behavior. But none of it is unreasonable. And the vendors who embrace the model will find it is mutually beneficial, for both vendor and customer. The vendor will earn a long-term relationship in which the customer turns to the vendor for as many needs as the vendor is capable of managing.

What if the answer is ‘no’?

Not everyone will embrace the strategic relationship model. Most vendors are deeply invested in a short-term mindset, particularly those who have a powerful market advantage, such as companies with a strong brand (e.g., a big consulting firm), a unique product (e.g., a disruptive innovator) or an entrenched market position (e.g., a monopolist).

But it’s easy to overestimate the power of a vendor with a short-term, transactional mindset, particularly when you’re stuck with one. The fact is that, in a market economy, no one can afford to be complacent. Schumpeter’s “creative destruction” threatens even the most powerful incumbents. Only those vendors most invested in listening to their customers will survive.

(Marcel Bryar is a founder and managing director of B&W LLC, a boutique consulting firm specializing in negotiating vendor contracts, issues and disputes).