Rethink Your Relationship with Your Vendors
We’ve come a long way from the days of horrific working conditions of the industrial age. Yet many companies are still as tough on their vendors as managers were on their employees a century ago. In the gig economy the line between a freelance employee and a traditional vendor has become blurred. Smart companies are therefore increasingly treating their gig workers like employees to get more of them.
The problem with current company-vendor relations starts at the beginning of the relationship. Companies go through long, expensive vetting processes for vendors, often spending months and significant resources to ensure they select the best bidder. Then, instead of welcoming them with open arms, they negotiate hard on pricing, delay payments, and generally squeeze them in any possible way to get the best possible terms. Despite all the effort that went into the selection process, companies often view vendors as “easily replaceable” and keep an arm’s length relationship.
Historically, this approach made sense. It helped keep costs low, and ensured managers were allocating budgets wisely. After all, external goods and services can represent 70 percent of a company’s cost of goods, so even small savings in this area can lead to large improvements for a company’s profitability. The automotive and retail industries provide great case studies for this. Every consumer products company in the earlier part of the decade would bend over backward to work with Wal-Mart, and for good reason — they have the largest brick-and-mortar retail distribution channel in the world. Vendors knew what they were getting into and were often willing to trade tough terms in exchange for the large volume and market access Wal-Mart can provide them. In this inherent social contract, buyers were willing to give vendors the opportunity to make millions in profits and vendors would develop a thick skin and know how to take care of their own employees so that they didn’t feel abused.
Procurement in the New Economy
But the world has changed. We are no longer living in the age of Ford or Wal-Mart; enter the “Uberization” of everything. Now, vendors are highly likely to be individual contributors, or a small team of loosely connected professionals. This sort of “gig work” is only expected to grow. An UpWork commissioned study found that 57.3M people in the U.S. freelanced in 2017, 36% of the total workforce. Moreover, McKinsey predicts that online talent platforms could boost global GDP by $2.7 trillion by 2025.
So while the make-up of vendors has changed, how companies treat them has not not really caught up. We’ve all cringed when our parents started using Uber and gave the driver 3 stars despite the successful (and uneventful) trip. But a similar phenomenon is happening with corporate-vendor relationships. Procurement departments typically aim to standardize pricing across suppliers. In order to do so, they need to look at the objective and measurable signs of quality they are paying for. This approach works very well when purchasing goods and gadgets. For example, you want your procurement department to only pay a premium for a hard disk drive if its mean time between failures (MTBF) is higher than competing products. The problem arises when similar practices are applied to service vendors and gig workers. For instance, two MBA graduates, even if they both have the same measurable qualifications for a job, can vary substantially in how productive they are for a company. To wit: Graduates from the top 12 MBA programs launched over 5,000 start-ups from 2006 to 2018. These founders were all equally credentialed, but only a few of the companies became successful.
Successful managers know that a star performer can be exponentially more productive than an average performer with the same credentials. For this reason, more hiring managers are obsessing about finding the right person for the job. Yet when it comes to finding gig workers, procurement teams still think of their services as a commodity, demanding that companies pay a standardized rate to service vendors and gig workers based on measurable credentials.
Reforming Corporate Procurement
There are several things business leaders can do to improve their vendor management practices in the new gig economy:
Develop a systematic selection process and treat negotiations as a win-win. Treat the selection process as if you were hiring a new employee. Work with your team to develop objective criteria, agree on respective weightings, and then make a value-based decision. As a recent HBR piece points out, applying hard ball tactics could destroy the quality of delivery.
Treat your vendors like employees. How do you get the most out of your employees? If feedback and mentorship works, do that. If taking them to lunch once a month motivates them, try that. You probably already have a good formula for success, so there is no need to reinvent the wheel. All that is required is a mindset shift to view vendors in the same way as full-time workers.
Develop and track metrics. Determine what success looks like upfront and hold vendors to that. Whether it’s new widgets or new customers signed, agree on the metrics from the start and resist the urge to make this a moving target. Also resist the temptation to hold your gig workers to unreasonably high standards. For instance, old school vendor-processes dictate that vendors should only be paid when you get paid, but would you expect to attract good employees if their compensation was just commission-based?
Neither organizations nor service providers benefit when the wrong approach is employed. Organizations should take the lead in treating their vendors and gig workers like strategic partners and employees.
This content was originally published here.