Supplier relationship management lessons from the car industry

IT can learn a lot from the car industry, which has transformed supplier relationship management

IT can learn a lot from the car industry, which has transformed supplier relationship management since the first Ford Model T (pictured) rolled off the production line over a century ago.

Time and materials cost analysis is often used to scope out the cost of an IT project. Such analysis allows procurement to complete a project at the lowest cost.

But today, when IT suppliers pitch innovation and strategic partnerships, they are often constrained by negotiations over time and materials.

An MIT Sloan Management article from 2010, which looked at a benchmark study of relationships between tier one suppliers and major car manufacturers, noted: "In the automotive industry, supplier willingness to invest in and share technology is known to be a major differentiator of successful customer/supplier collaboration."

Innovation to strengthen relationships

Speaking about his recent experience with a new car, Duncan Jones, a principal analyst at Forrester, said ambient lighting in a new Mercedes is not a feature the customer would necessarily specify, nor is it likely that Mercedes stipulated ambient lighting as a key requirement from its tier one lighting supplier.

Strategic IT partnering

In 2003, Microsoft forged a partnership with the London Borough of Newham. The deal gave the supplier a platform in local government, while Newham benefited from early access to new products and expertise. 

At the time, Newham also signed a deal with HP. The relationship between Microsoft/HP and Newham are still going strong, 12 years on.  

"I would credit both Microsoft and HP for being flexible with our agreements to allow 'true-down' to be a term used rather than just 'true-up'," said Geoff Connell, director of ICT at Newham and Havering Borough Councils.

In other words, he is able to reduce his IT expenditure with the two suppliers, as well as increase it.

Instead, the company supplying the lighting offered this technology to Mercedes to build a stronger partnership with its customer.

Similarly, Infosys developed technology for another car maker that combined motion sensors with the safety control system to stop the driver fiddling with the sat-nav while driving, said Jones. The system could sense if the person pressing the buttons was the driver or the passenger.

Why would the Indian IT services company offer its intellectual property to the car maker? "Since Infosys was a technology partner, it sat down with the customer and discussed the idea it had for using motion sensors for car safety," said Jones.

The car company funded a proof of concept, rather than running a traditional procurement. Instead of creating a detailed specification and selecting the cheapest bid, the car manufacturer worked collaboratively with Infosys.  

"This style of co-creation is the future of software development, where the software is so key to the product. The commercial departments have to get out of the mindset of issuing a contract to the lowest bidder and instead treating the supplier as a partner," said Jones.

Enterprise and government challenges

Jones believes the way IT is sold and the way IT departments specify requirements prevents innovation

As an analogy, he pointed out that one would not issue a detailed specification to an interior designer. Instead, the client would trust the designer's instinct and creativity. A good designer probably understands customers' requirements better than they do themselves. Should the CIO have this level of trust with a key supplier?

Unfortunately, in multi-national companies and large government departments, IT procurement is usually handled after the IT department has formalised its requirements. Negotiations tend to focus on near-term costs over long-term value. 

Jones said many systems integrators are put off by government contracts due to the limited scope to be rewarded for exceeding expectations. 

Work with suppliers which really value their reputation in your business sector, as they will be more careful about acting in ways that cause you as a customer to speak positively about them as a supplier
Geoff ConnellNewham and Havering Borough Councils

While the government strives to deliver value to the taxpayer and a multi-national needs to demonstrate shareholder value, a contract that restricts what the supplier can and cannot do with the intellectual property it creates limits its ability to innovate. 

In a contract biased heavily towards the buyer, where does the supplier gain any value? Who develops IT’s equivalent of Mercedes’s ambient lighting?

Speaking on how to build successful partnerships with suppliers, Geoff Connell, director of ICT at Newham and Havering Borough Councils, said: "Both parties must benefit from the partnership arrangements."

Ideally, the buyer and supplier each need to ensure that the value of the partnership is balanced. 

Connell recommended that IT departments should set objectives that are mutually compatible, clearly articulated and documented to ensure they survive the test of changing personnel.

A fresh start with innovative startups

A Gartner survey of 2,000 senior IT decision-makers in 2013 highlighted the need for companies to change their approach to IT procurement if they were to seek out innovation.

The research pointed to a shift, with 68% of those questioned saying they would change their IT provider, while a quarter said they would go with smaller suppliers. 

Some larger businesses run incubator programmes to identify new technology startups they could work with. For instance, through its JLab incubator programme, department store John Lewis identified Localz, a company which developed micro-location technology. John Lewis plans to run a pilot using the technology to improve its click-and-collect service.

Arguably, major suppliers lack the appetite to innovate. Some would argue that they have become lazy, reaping the recurring licence fee and enterprise software maintenance revenue for too long. But for a partnership to be deemed commercially successful for both parties, the buyer needs must take on as much responsibility as the supplier. 

“In my view, people do business with people. You work well with those you understand, trust and, ideally, like," said Connell.

According to Connell, suppliers need to see that although they might lose out in the short term, there is longer-term benefit in being flexible: "My advice is to work with suppliers which really value their reputation in your business sector, as they will be more careful about acting in ways that cause you as a customer to speak positively about them as a supplier."

The automotive industry has evolved to a point where there is now a high level of trust and understanding with key suppliers. In contrast, IT contracts are littered with licensing gotchas, leading to mistrust. This lack of trust with suppliers will remain so long as IT contracts are treated in the same way as buying widgets. 

Unless the process of buying and selling IT matures, true innovation and the potential to build new revenue streams promised by the internet of things will be stymied.

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