How does this apply to vendor management? It may mean that a buyer or vendor who is getting less than they expected won't react provided they perceive as fair and equitable the process for distributing the rewards. Thus, an outsourcing relationship can remain strong even when circumstances begin to favour one party provided the mechanism for redressing imbalance is perceived as fair.

I've prepared two diagrams below that attempt to capture this relationship. The first diagram shows an outsourcing contract with a high degree of procedural fairness (clear, reasonable processes defining when and how to make changes to the relationship). The curved line shows the fluctuation in the distributive fairness (equity of effort to reward) as time passes. When the line moves closer to the top of the box representing procedural fairness (buyer line) it indicates that the buyer is putting in more effort for less reward than they expected at the outset. Note that in the diagram below the curved line does not cross either horizontal line which indicates that despite the fluctuating equity neither party reacts to the fluctuations.

The second diagram shows a relationship with a low degree of procedural fairness. Note that the inequity in the relationship fluctuates to the same extent as in the first diagram but results in two reactions from the buyer and one reactions from the vendor (a reaction occurs where the inequity crosses the top or the bottom of the procedural fairness box). In this relationship, the reduction in procedural fairness has resulted in reactions that would not have occurred in the above relationship. Note that reactions to inequity can occur in many forms ranging from litigation to underservicing.

The lesson for contract drafters is to spend time on the processes you are implementing for dealing with change throughout the life of the contract.

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In summary, the Vendor Manager must establish clear aspirational goals for the supplier relationship. Once they have established the goals and tied remuneration to the goals, the environment is set for a flexible relationship that can change with the times. If the parties are focused on the aspirational goals, they are more likely to be flexible [1] [2] [3] and to demonstrate innovation.

Of course the trick is tying remuneration to the goals and establishing suitable change control procedures … more on that later.

Technorati Tags: outsourcing, vendor management

M@n@gement has a terrific series of article in their special edition: Making Interorganizational Relationships Work. Of particular note is an article by Knoppen and Cristeaanse entitled A Transformational Lens on Supply Chain Partnerships in which they assert that “The transformational lens contributes by facilitating a more complete picture of partnerships than would be achieved by considering each of its constituent bodies of literature in isolation, and sheds new light on the temporal aspect of partnerships.” The paper discusses the overlap between transactional cost analysis, organisational design and network literature in analysing supply chain partnerships.