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Ten Elements of a Successful Supplier Agreement

Not happy with a supplier? Perhaps it’s time to look in the mirror. Or better yet, dig out your contract and examine it from a fresh perspective.

In 1968 the legal scholar, Ian R. Macneil, in Contracts: Instruments for Social Cooperation,1 observed that most contracts are poorly equipped to address what businesses need. He argued that contracts are rooted in the classical approach to contract law, and thus concentrate on transactions and legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages.

Note that Macneil wrote that 45 years ago, but we’re still mired in those classical approaches to contract law.

For example, a common mistake companies make in outsourcing and supplier agreements today is that they develop detailed statements of work (SOWs) and then strictly define the work to be done. This handcuffs their suppliers’ innovation and flexibility.

A flexible approach and agreement framework is needed, one that the Nobel Laureate Oliver E. Williamson suggests is highly adjustable or adaptable, rather than one that prescriptively outlines detailed transactions, rigid terms and conditions, SOWs and working relations.2

University of Tennessee researchers set out to find a better way to develop strategic supplier agreements, and their research led them to study some of the most successful business relationships such as McDonald’s, P&G and Microsoft—all with award-winning supplier relationships.3 This research found that successful agreements operated differently; they moved away from traditional buy/sell arms-length contracts to long-term, win/win relationships based on a “what’s-in-it-for-we” mindset. This approach is called Vested because buyers and sellers collaboratively craft contracts that are steeped in mutual advantage, binding each party to a collaborative, trusting win/win approach. They are Vested in each other’s success.

Vested requires the parties to jointly build a solid, cooperative foundation for sharing value, and to do so under a flexible contract framework that allows them to embrace the dynamic and demanding nature of business in a fair manner. This approach allows the parties to develop a sustainable relationship that promotes investment in innovation.

But how do these successful companies do it? They follow ten elements—each profiled below.

The Ten Elements of a Vested Agreement
What goes into a successful Vested business agreement? University of Tennessee’s Center for Executive Education joined with the International Association for Contract and Commercial Management on The Vested Outsourcing Manual—a step-by-step guide for developing collaborative business-to-business agreements and working rules that facilitate successful and long-lasting business relationships based on mutually desired outcomes.

The Vested Outsourcing Manual outlines ten elements to include when developing an outsource contract. Think of the elements as signposts directing suppliers and service providers along the right road to the desired destination: a successful, long-term Vested business relationship.

The Ten Elements are keyed to implementing Vested’s “Five Rules,” as shown in the following table:

10 elements

Rule #1: Focus on Outcomes, Not Transactions

Element 1: Business Model Map
This first step is to understand and document the supplier or outsourcing business model. It is vital to map potential outcomes in order to see how well the parties are aligned. By jointly mapping a model the parties will pinpoint the transactions of value, leading logically to collaboration, loyalty and mutual satisfaction, market share and sustainable profit. The element also fashions a culture in which the company and the supplier maximize profits by working together more efficiently, no matter who is doing the activity.

Element 2: Shared Vision and Statement of Intent
When the business model is mapped, the parties then work together on a joint vision that will guide them for the duration of the Vested relationship. A cooperative and collaborative mindset opens a conversation between the parties. As a result, they share what is needed, admit to gaps in capability and aim to focus on the benefits that the other party can bring to enhance any gaps in capability. That vision and alignment forms the basis of a statement of intent drafted by the outsourcing teams.

Rule #2: Focus on the What, Not the How

Element 3: Statement of Objectives/Workload Allocation
This lays the foundation for the parties in a Vested partnership to do what they do best. Depending upon the scope of the partnership, the company transfers some or all of the activities needed to accomplish relationship goals to the service provider. Together they develop a statement of objectives (SOO) that describes intended results, not tasks.