Posts Tagged ‘Fairness’
In Uncategorized on September 7, 2007 by hudgeon Tagged: Cost Analysis, Fairness, Value Innovation
In university, I wrote a paper on the role of attractiveness in selecting one’s spouse. I was interested in this issue because, whilst the evidence strongly supported the proposition that spouses tended to be similarly attractive, the prevailing causal theory didn’t sit well with me. The prevailing theory explained the evidence as follows:
- everyone tries to get the hottest guy or girl they can,
- the distribution of attractiveness of men and women follows the same curve, thus
- the hottest couples pair off and the less hot couples settle for each other.
The reason this didn’t sit well with me, aside from dooming me to never be with hot chicks, was that, whilst couples on average tended to be similarly attractive, the evidence showed substantial variance in attractiveness. If everyone was pairing off as the theory suggested, the variance should be minimal or at least consistent across the population.
After gathering as much of the data from previous studies as I could get my hands on, I found that a different model also explained the observation that couples tend to be similarly attractive. My model was that each person has a base attractiveness requirement that, once met, permitted selection on other characteristics such as sense of humour, confidence, or skill at dancing the Macarena. This explained both the average result as well as the variance and, with dancing practice, meant that I too could one day score hot chicks.
Successful long-term supplier relationships seem to follow a similar pattern. Once the buyer and supplier are satisfied that they are receiving a demonstrably attractive price, they can then focus on other aspects of the relationship such as innovating to create additional value for their companies, investing to integrate their AP/AR systems to transact more quickly and easily etc. Conversely, selecting the supplier with the most attractive price may require forgoing other characteristics that may be more valuable to you than exceeding your base price requirements.
In Risk on June 9, 2006 by hudgeon Tagged: Fairness, Outsourcing, Politics, Procurement, Vendor Management
My previous post discussed the importance of maintaining your reputation as a credible purchasing organisation. I would also rank highly the importance of maintaining your reputation as a credible contracting organisation, but I would, apparently, be wrong.
The State Government of New South Wales (Australia's most populous state) is currently embroiled in a dispute with its partner in a toll road running underneath Sydney. Last year's opening of the PPP project, called the Cross-City Tunnel, started a running bun fight between the operator of the tunnel and the State government that has consumed hundreds of hours of senior executive and senior politician time and resulted in untold column-inches of press coverage.
The constant coverage has whipped up the fury of Sydney motorists who are refusing to use the Cross-City tunnel and choose instead to run a maze of back streets to avoid it. The source of the discontent is not particularly relevant. Suffice to say, it started as a simple distributive justice issue that should have been easily resolvable – people who travelled a short distance in the tunnel were required to pay nearly as much as those who travelled its full length. But the issues have now, hydra-like, multiplied and neither side can back down without face-egg.
The tunnel operator's position is that they are losing a shedload of cash and need to maintain their contracted unit cost increases. The State Government's position is that, despite the wording of the contract, they want the operator to reduce the unit cost and allow for the re-opening of side streets closed to drive traffic through the tunnel.
This week, after three months of negotiations, both sides have walked away from the table.
Two days ago, the State government handed down its budget. Somehow, despite the warm Australian economic climate, the State government of NSW is in deficit.
And yesterday, this gem appeared in the press. Despite all of the problems with the Cross-City tunnel, the State government intends to rely primarily on PPP projects to build infrastructure over the coming years and doesn't see it's behaviour in the Cross-City tunnel dispute impacting the success of future projects.
Will the private sector come to party and tender for this work? Of course they will. But, after watching the Cross-City tunnel fiasco, I wonder what risk premium PPP bidders will put on their offers.
In Risk on June 4, 2006 by hudgeon Tagged: Cost Analysis, Fairness, Procurement, Vendor Management
Your procurement department’s most valuable asset is not its people, technology or processes, but its credibility. You can increase resourcing, upgrade technology and implement new processes by throwing money at the problems, but regaining your lost credibility is far more difficult and potentially far more costly.
Imagine you run a small procurement department managing $200 million in spend. If it is not performing well, you might make substantial improvements by throwing in some extra cash. However, if your department has lost its credibility, you can't just buy it back and, of greater concern, your contract spend will probably increase, perhaps dramatically, because fewer suppliers will tender for your work and those who do will increase their tendered margins in the belief, rightly or wrongly, that they have an advantage over other respondents. This can quickly get very expensive: For your procurement department, a 1/2 percentage point increase in contract prices means an additional $1 million in spend.
Telstra, Australia's largest telecommunications carrier, is currently facing this situation, but on a much larger scale. Unsuccessful respondents are alleging that Telstra is awarding contracts to pals of CEO Sol Trujillo without following a fair competitive-tendering process. Even if not true, these allegations may lead to higher prices through a reduction in the number of suppliers tendering for work and an increase in tendered margins.
As an example of the credibility issues, last year, Telstra retained Accenture to run a tender for a $1/2 billion billing system. The tender resulted in the selection of an Accenture-lead consortium. The other respondents, as you might imagine, are crying foul. Amongst the most vocal is Amdocs. The Australian Financial Review reports that “Amdocs is now bidding on another major contract and insiders say Telstra will be under pressure to deliver a deal.” You can bet that Amdocs will consider this when pricing their offer.
In Risk on May 25, 2006 by hudgeon Tagged: Academics, Fairness, Outsourcing, Procurement, Vendor Management
John Gottman’s research on predicting interpersonal relationship failure should resonate with vendor managers. Gottman’s team, profiled in the Australian Financial Review and Malcolm Gladwell’s Blink, has identified four traits that, if present, indicate that the relationship has an 85% chance of failure. The odds of failure increase to 97.5% if one party's attempts to repair the relationship are not reciprocated. The St Cloud St University website describes the traits as follows:
- "Criticism: Any statement that implies that there is something globally wrong with one’s partner. Usually starts with “you always” or “you never”
- Defensiveness: A general stance of warding off a perceived attack. Unfortunately, defensiveness usually includes denying responsibility for the problem, and this fuels the flames of conflict because it says the other person is the guilty party.
- Contempt: Any statement or nonverbal behavior that puts oneself on a higher plane than one’s partner, i.e. mocking. Another example would be correcting someone’s grammar when he or she is angry with you. (There is a universal facial expression for contempt) …
- Stonewalling: Occurs when the listener withdraws from the interaction. Stonewallers look away and down, maintain a stiff neck, vocalize hardly at all – in effect, convey the presence of an impassive stonewall."
Gottman describes contempt as the “Sulphuric acid of love” and its presence is the single best predictor of relationship failure.
So, the lesson: If you see these traits, particularly contempt, in one of your vendor relationships, you should start hiding your assets!
In Risk on April 17, 2006 by hudgeon Tagged: Academic Research, Cost Analysis, Fairness, Outsourcing, Procurement, Quality Analysis, Vendor Management
An interesting study in the Journal of Empirical Research on Human Research Ethics confirms a growing body of work showing that people care more about procedural fairness than distributive fairness.
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.
Technorati Tags: outsourcing, vendor management
In Risk on April 8, 2006 by hudgeon Tagged: Academic Research, Connecting, Fairness, Outsourcing, Procurement, Vendor Management
Earlier today, I reviewed my posts and decided that I should have tag-lined my blog "Sh*t happens. Deal with it". I intended to write about all aspects of vendor management but I've found I've focused solely on the importance of building sufficient flexibility into contractual relationships to allow them to handle unforeseen events that occur throughout the life of the contract.
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
In Risk on April 8, 2006 by hudgeon Tagged: Fairness, Outsourcing, Procurement, Vendor Management
Yet another article on the importance of building flexibility into relationships:
Business Finance
Even when companies research, plan and enter a partnership with the best of intentions, it is still important for them to have a predefined process for dealing with problems and conflicts as they arise. "Flexibility post-agreement is just as important as flexibility pre-agreement," says MacInnis. "No one can legislate for every eventuality as each party changes and evolves, so there must be some way to deal with unforeseen changes in scope." If the alliance agreement and partners are flexible enough, the principles governing the relationship can be effective over the long term even as the alliance changes and evolves.
Technorati Tags: vendor management, outsourcing, contract management
In Risk on March 26, 2006 by hudgeon Tagged: Connecting, Fairness, Outsourcing, Procurement, Quality Analysis, Vendor Management
I have been thinking recently about the relationship between trust, service delivery and contract management. These three dimensions are loosely linked over the short term but tightly linked over the long term. For example, in the early stages of a relationship, a purchasers level of trust in their supplier is built largely on the supplier’s reputation and conduct during the contracting negotiations. The supplier’s contract management and service delivery may be abyssmal, but the levels of trust may initially be high. However, as time goes on, the supplier’s ability to deliver the services and their skill at managing the contract have a growing impact on the level of trust in the relationship.
The following diagram is my attempt to capture the dimensions graphically.
The vertical axis shows the strength of the contract management, the horizontal axis shows the strength of the service delivery and the size of the circle is determined by the trust in the relationship.
The interesting thing about the above diagram is that each quadrant has a particular circle size associated with it. The circle in the bottom left quadrant has a tendency to be small while the circle in the top right quadrant has a tendency to be large. Each quadrant is like an environmental niche that best supports circles of a particular size; although it is possible for outsized or undersized circles to live in that quadrant for a period of time.
At the start of the relationship, the circle is typically large but it can exist in any quadrant. As the relationship progresses, one of two things happen: either the large circle moves into the top right quadrant (its natural environment) or the circle becomes smaller.
In Risk on February 20, 2006 by hudgeon Tagged: Fairness, Procurement, Vendor Management
An article on e-procurement solutions highlights the fact that one of the most neglected areas is that of supplier adoption.
There are three topics that are certain to grab any supplier’s attention:
- The opportunity to gain additional sales;
- The ability to increase margins;
- Getting paid more quickly.
Barriers that need to be overcome:
- The perceived technical complexity;
- The level of investment required;
- Security issues;
- A perceived focus on price rather than overall quality of service.
There are three main issues that must be addressed to achieve effective electronic trading between customer and supplier:
- Access to the supplier’s electronic list of goods and services (i.e. the catalogue);
- An alternative method for suppliers who do not have a catalogue (e.g. service suppliers);
- The ability to send and receive electronic business documents (i.e. purchase orders and invoices).
In Uncategorized on February 19, 2006 by hudgeon Tagged: Academic Research, Fairness
Gary Bolton and Alex Ockenfels prepared a paper entitled the Theory of ERC which postulates that a person’s contracting behaviour can be predicted if you know their level of financial gain and their propensity to deal fairly with others.
“In this paper, we describe a simple model we call ERC to denote the three important kinds of behavior the theory captures: equity, reciprocity and competition. We show that ERC is consistent with a wide variety of experimental observations gathered by many independent investigators. ERC is simple to apply – in part, because it is not a radical departure from standard modeling techniques. The major innovation is the premise that, along with the pecuniary payoff, individuals are motivated by a ‘relative’ payoff, a measure of how the pecuniary payoff compares to that of the other players. Different games present different sets of tradeoffs between pecuniary and relative gains. What ERC demonstrates – and the point we will stress – is that a simple model of how pecuniary and relative motives interact, organizes a large, and seemingly disparate group of experiments as one consistent pattern of behavior.”
