Failure to Use Market Power is Waste: Welcome to the Dark Side

Having worked for an organisation where failure to use market power was considered as a form of waste, I have seen the dark side of business relationships and contracting.  This form of aggressive dealings with trading partners was described by Oliver Williamson, the Nobel Prize winning economist, as taking a “muscular approach” to contracting.  Williamson also described this approach as “myopic” as it will always drive up costs in the long run.  Partners subjected to this use (misuse?) of market power will find overt or covert ways of protecting themselves from their powerful partners.  As the powerful players “use up” their partners they also fine that it is harder to find people that will deal with them on these terms which can lead to cost increases,  constraints on business growth or even continuity of supply.

The companies that use muscular methods don’t always see the problem.  They often argue that they have fine “collaborative” arrangements with their trading partners.  An example cited by the authors of “Unpacking Oliver”[i] showed that when powerful customers arbitrarily imposed extensions in payment terms (30 → 60 → 90 days) they reported that collaboration was alive and well in their relationships.  The suppliers on the receiving end reported that collaboration was going backwards.  Part of the problem is that the powerful customers were applying “megaphone collaboration” (named after the complaints about some countries’ diplomacy efforts where lecturing replaces discussion).  This approach was described by Dapiran & Hogarth-Scott (2003)[ii] as mistaking collaboration with compliance.

Sometimes we find ourselves setting up business relationships where both parties in the discussions truly believe in a win/win result.  This lasts right up to the point when the corporate lawyers become involved with their “standard” contract with the “boiler-plate” clauses.  All of a sudden the conversation shifts to who is going to hold who harmless and who can exit the arrangement for convenience (and who must give long notice with penalties).  We do this though because “it’s the law” – Right?  Wrong! Most of these types of clauses are included in contracts because we choose to.  As emphasised in Unpacking Oliver, we need to not only negotiate “win/win” but also contract “win/win”.

Unpacking Oliver is about identifying 10 lessons from the work of Oliver Williamson to be applied to developing strategic business partnerships.  While they are all important, several have been highlighted for particular focus for those in the trenches negotiating agreements:

  1. Outsourcing is a continuum, not a destination.
  2. Develop contracts that create “Mutuality of Advantage”.
  3. Understand the Transaction Attributes & their Impact on Risk & Price.
  4. The greater the Bilateral Dependencies, the greater the need for Preserving Continuity.
  5. Use a contract as a framework, not a legal weapon.
  6. Develop safeguards to prevent Defection.
  7. Predicted Alignments can minimise Transaction Costs.
  8. Your Style of contracting matters; be credible.
  9. Build Trust, leave money on the table.
  10. Keep it simple.

Whoops, they all got highlighted!  So if you want to read more about the work of Oliver Williamson and the 10 Lessons, then download your copy of “Unpacking Oliver” from the Vested Outsourcing website http://www.vestedway.com/vested-library/ .

You will also find other useful resources around this subject at this website.

If you need more information about setting up strategic  business relationships or want help to do so, don’t hesitate to contact us at andrew.downard@adsupplychain.com.au or call +61(0)419 581 705.

Further Reading:



[i] Vitasek K et al “Unpacking Oliver: 10 Lessons to Improve Collaborative Outsourcing” http://www.vestedway.com/vested-library/

 

[ii] Dapiran, G P, Hogarth-Scott, S, 2003, Are Cooperation and Trust being confused with power? An analysis of food retailing in Australia and the UK, International Journal of Retail & Distribution Management, Vol 31, No 5, pp 256-267

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