Creative Destruction and Business Relationships

In previous blogs I have argued that better and more collaborative relationships with your business partners are a relatively untapped source of competitive advantage.  If this is the case, why would we need to consider bringing a close and collaborative relationship to an end?  There are several reasons, not the least of these is that ‘business happens!’ We may have every intention to continue the relationship but circumstances make it redundant.  While we might mourn the loss of a great business relationship, the story is not all negative.

Firstly the macro story, the term ‘creative destruction’ was coined by the economist Joseph Schumpeter (1942) to describe the incessant product and process innovation activities where out-dated production methods are replaced by newer and more efficient ones.  It has been stated that ‘creative destruction’ accounts for over 50% of productivity growth.  The destructive process acts to free up the factors of production so that they can be used in the newer and more efficient processes.  If the process of creative destruction is held back, by labour market regulation for example, then this imposes a cost in forgone efficiency on the economy.

It is easy to see the same mechanism at play in business relationships.  Should partners persist in retaining an outmoded relationship, they will suffer a decline as a result.  Take for example an arrangement where a customer for steel components is facing a market where lighter and lower cost plastic components are entering.  Even if the relationship is a long and close one, it is in both parties’ interests to bring it to an end.  The customer, if persisting with outmoded steel, will likely lose market share and potentially fail.  The supplier will retain the diminishing business with the customer and will likely miss the opportunity to seek out new markets and customers as they work to support their long term customer.  Both would benefit from a managed end to the relationship and a focus on realising new opportunities.

In the above example, the situation put forward is one where the decline is already underway with the entry of plastic components.  Sometimes businesses or even industries face the situation where the most ‘sensible’ thing is to destroy a competitive advantage before it is under threat.  This proposition has been put forward by Clayton Christensen in his book “The Innovator’s Dilemma”.  In essence what Christensen is saying is “destroy your competitive advantage before somebody else does!”  This approach can be very disruptive to a business and its factors of production but even more so to suppliers, particularly when things are going well and there are no signs of decline.

It is therefore clear that such changes must be well managed, not only for the suppliers who must continue, but also those where the relationship is to come to an end.  Managed badly, the ending of the relationships can lead to resentment, legal action and perhaps difficulty in forming or maintaining relationships in the future because of a tarnished image.

So when is the right time to work on the exit management plan for a business relationship?  Somewhat paradoxically, the best time is when the relationship is being formed.  At this time the nature of the relationship is being discussed and a clear eyed view can be taken of how the parties might untwine themselves in the most sensible way.  Recognising this, the Vested® team at the University of Tennessee have included the creation of an exit management plan as Step 9 in their ten step model for creating a truly collaborative Vested* agreement.

The ‘exit management plan’ covers a wide range of issues.  In their book “The Vested Outsourcing Manual” the authors provide a model that can be used as an aid in creating this plan.  The first element is rules around notice of termination.  Ideally the agreement between the parties will have eschewed the lazy “termination for convenience” clauses and given thought as to what conditions would bring the agreement to an end.  These conditions would include persistent service failures but also the “business happens” issues mentioned earlier.  The termination notice would also be defined as to how it is communicated and the details that it contains.  For example, the notice might not cover all the business between the parties, just the portion affected by external events.

Once delivered, the termination notice triggers the remaining elements of the plan.  In putting together the plan the partners would have agreed on a workable exit transition period.  This is because just like when you start a new piece of business, it takes time to wind down.  The work to be completed during the transition period may include:

  • ·         Program management processes
  • ·         Due diligence issues
  • ·         Continuity plans
  • ·         Facilities, tooling or systems handover
  • ·         Human resources issues/transfers
  • ·         Response time agreements for queries
  • ·         Co-ordination with third parties
  • ·         Timelines, responsibilities and communication plans.

As with any well founded business process there should be a governance and reporting  process that engages the right people in monitoring the execution of the ‘exit management plan’.

The next element while developing the plan is to discuss what the parties agree to do if the relationship suffers a catastrophic failure, a complete relationship breakdown.  This is tough to do at the beginning of a relationship but it is easier done then than when things have spiralled out of control.  Again this should be more than agreeing on the legal jurisdiction.  It should ideally be a graduated response that moves through good faith negotiations, mediation and arbitration.  Only when this has failed should the courts be engaged (accepting the fact that legal action can be triggered at any time during a relationship).

The final point to make is that the exit management plan is more than an expression of good intent.  It is a detailed plan (likely based on the transition plan into the business) that can actually be used to transition out of the business.

So, do your agreements include an operable exit management plan?  Should you be sitting down with your most important trading partners and developing such a plan today?

If you would like help in developing an effective ‘Exit Management Plan’, or want to find out more about Vested then contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

 

This entry was posted in Performance Improvement, Supply Chain Best Practice, Supply Chain Collaboration, Supply Chain Innovation, Supply Chain Relationship Management, Supply Chain Risk. Bookmark the permalink.

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