How Collaborative Commerce Works

The idea that collaboration with business partners is a successful and profitable approach is well accepted.  This concept is also well supported by numerous case studies and research.  Despite this support, many businesses struggle to move beyond lip service to the idea of collaboration.  Many believe collaboration puts them in a position of weakness versus their partners.  Others believe that a failure to use “market power” is a form of waste.  Both these perspectives are missing the point of collaboration and how it generates benefits to both parties.

The theories supporting how collaboration works have been around since the 1700’s and the writings of Jean-Jacques Rousseau with his illustration of the concept using a stag hunt.  Three hunters by collaborating can bring down a stag; however if one of them is distracted by chasing a rabbit they will end up with nothing.  The mathematical proof of Rousseau’s proposition was provided in more recent times by John Nash (of “A Beautiful Mind” fame).  Also weighing into the fray was Nobel laureate Oliver Williamson with his theories around transaction economics and how collaborative relationships involve lower costs versus more “arm’s length” ones.

All of the above perspectives have been updated and made more accessible by groups such as the Vested Outsourcing team at Tennessee University, or Professor Stuart Diamond from Wharton.  They provide excellent “how to” models for setting up and negotiating collaborative business relationships.  The 5 Steps from the Vested Outsourcing model are a good place to start to understand the concept in practice.

  1. Develop an outcome based rather than a transaction based model.
  2. Focus on the what, not the how.
  3. Clearly define measurable desired outcomes.
  4. Set up pricing model incentives to optimise cost/service performance.
  5. Have a governance structure that is focused on insight rather than oversight.

Stuart Diamond weighs in with advice on how you can do better than win/win in a deal.  A key issue according to Diamond is to exchange things that the parties value differently.  The goal here is to offer the other party something that they value highly but you do not.  In return, if they provide you with something that is not valued highly by them, but of high value to you, then you have jointly increased the value of the deal.  Thus a better than win/win result has been achieved.  The principle put forward by Stuart Diamond can be considered as the micro version of the macroeconomic principle of Comparative Advantage, where a country can produce goods at a lower opportunity cost than their trading partner.  They could perhaps still produce the item more cheaply than the trading partner but they recognise they get more value by using their resources for a more productive purpose.

A working example comes from the resources industry where a pump manufacturer was under pressure to provide unit cost reductions to a major client.  There was little spare margin and warranty costs also made the deal marginal for the supplier.  The exchange that created more value (than a cost reduction would achieve) was the supplier offered to have their technicians fit the pumps at the customers’ facilities.  This both saved the customer labour hours to fit the units, and reduced the capital equipment downtime because the suppliers technicians were more experienced and skilled in the fitment process.  In return, the supplier maintained unit pricing and gained a reduction in warranty costs because of the more expert installation process.  Both parties gained from the new arrangement and experienced better outcomes.

So, to deliver business arrangements that beat win/win collaboration, follow the Vested Outsourcing 5 Steps model and take Stuart Diamond’s advice and exchange things you value differently.  Remember it’s not what you pay that is important it’s what you get!

If you would like to know more about Collaborative Commerce, or need help setting up a better than win/win deal, feel free to contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

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