One challenge that almost every procurement organization will face is having a customer of your company asking you to become a customer of its company. This situation is very common, yet can be very complex. The size of the customer, its business and industry, the scale of business between your companies and the potential to influence other procurement relationships all contribute to the complexity. There is value of doing business with a strategic partner – the challenge is assessing when the relationship is more based on reciprocity vs. strategic leverage.
How Does Size of An Enterprise Influence Reciprocity?
Procurement organizations usually have a code of conduct or similar policy for strategic sourcing practices that most “customer” companies will accept. For larger companies, one of the intents is to avoid an environment of reciprocity. This policy explanation usually works well when dealing with customers who are small relative to the volume of your total revenue or spend in a category. These customers understand that it is impractical for you to try to divide the company spend among many “customer” suppliers. However, there may be more complexity when a very large customer of yours wants you to buy goods or services from them.
What’s driving the initiative for reciprocity?
In a larger company with large customers, the initiative for becoming mutual customers may be driven by the sales organization or executive relationships. Usually this gains momentum and leads to some uncertainty for the procurement organization about how to respond. For example, if leadership indicates your company should buy from a specific customer, does the leadership want the purchases competed at best market cost, or does it want procurement to simply “give them the business” or to “just give them some business”? Is an executive dictating the decision, or merely providing guidelines? What is procurement’s responsibility or role in this transaction? Will the arrangement cross any legal lines?
This is not saying that reciprocity is illegal (as this post is not intended as a legal brief) – the Sherman Act provides some definition around the legality of reciprocity. One definition in the Sherman Act determining legality is assessing how much the reciprocity interferes with the marketplace.
Beyond the legal concern, there is also the market or public perception to consider for some companies. Strategic relationships are explainable, but noise may follow when a substantive strategic sourcing decision is made that is not the best deal for the shareholders. This may also set the tone for future sourcing efforts for procurement.
Does reciprocity become the standard that any large customer of yours should now expect? Tell us how your organization leverages or eliminates such complex value chains. And stay tuned for more in the next part.
Recognizing and managing the difference between a strategic partnership and improper reciprocity is vital to successful business relationships. GEP’s procurement strategy experts can help you determine the best approach for your enterprise. Contact us today.