Q2 Magazine 2023
Managing vendor relationships
Vendor relationships are like a marriage...
But this knowledge alone is not what makes a couple click – they need a special connection that cannot be quantified. What is often called ‘good chemistry’ rests on a psychological bond that connects thoughts, feelings and emotions.
This bond produces a strong unity that creates passion and a willingness to go the extra mile, particularly when the going gets tough. Couples who take the me to establish this psychological bond during courtship are more likely to be on the same page on the wedding day and beyond. They often have the will and a better understanding of how to reset priories to keep the family together and remain on track with shared long-term goals.
A Vendor relationship also needs a psychological bond. This is not something that is usually discussed, but many case studies will testify to this psychological bond as the thing that can make or break the relationship. Think of the last me you spoke to someone in a call centre, for example your utility supplier. When the Operator builds common ground with you by mentioning your hometown, your favourite ﬁlm or one of your hobbies, even if your issue is not resolved, you somehow end the call feeling you had a better.
As we discuss the subject of vendor management, I will revert to the marriage analogy to emphasise the importance of the psychological bond that solidiﬁes the contractual commitment and enables both pares to enjoy an effective working relationship. I use the word ‘enjoy’ intentionally – just as a strained marriage leads to stress, sickness and lack of interest in doing anything in the home, a Vendor relationship that is frothy and strained is not effective and invariably burdens employees from both ﬁrms and reduces productivity. A typical Vendor contract can run anywhere from 3 to 15 years with costly exit terms, therefore it makes good business sense to build a relationship that is efficient and sustainable – both parties must be in it to win it!
Meeting ultimate client outcomes must take centre stage in the Vendor relationship. As inflationary pressures increase and ﬁrms become more focused on the boom line, there is a temptation to choose the cheapest Vendor while underestimating the medium to long-term impact that inadequate Vendor capability will have on the ultimate client experience. Firms have a ﬁduciary duty to their clients and this necessitates that they engage Vendors who not only meet their contractual obligations, but who also have the bandwidth to respond in an agile way at mes of stress, ensuring that buyers’ client outcomes are not compromised.
Contractual terms and performance goals must be monitored for compliance, while applauding good service delivery that enriches the client experience. Changes to work flows and reporting may be required by both parties, not just the Vendor, as operational issues are resolved. It is not simply a case of ‘we pay the Vendor and they must deliver’ without any involvement from the buyer. While the vendor may be well-intentioned, if they lack the operational or technological capabilities to deliver on their contractual obligations, like a failing marriage which ends in divorce, the inevitable contract termination clause will be enforced and this can be stressful and very costly. So how do we build good Vendor relationships?
The Vendor relationship starts even before contracts are drafted. While couples cannot know everything about their partners before marriage, during courtship, they learn key details about each other to establish a psychological bond. Similarly, a buyer needs to establish some basic facts about the Vendor’s people, processes and systems (includes their data architecture) to start building the psychological bond:
Vendor relationships are like a marriage, they need good understanding of the other’s capabilities, needs, growth plans and desired outcomes for dependants, complimented by a psychological bond
DNA and lived history – during courtship couples learn about each other both for practical as well as personal reasons. It can be very disruptive if a signiﬁcant fact that would have impacted the decision to marry is discovered after the wedding day. So too a buyer is reliant on the honesty of the Vendor to disclose all pertinent facts that will impact the decision to purchase. Buyers use the Request For Proposal (RFP) process, reference site visits, internet research and personal references to discover key facts about the Vendor:
Financial stability and support from a parent company – the long-term viability of the Vendor is crucial to ensure goods and services can be delivered over the term of the contract.
Corporate growth whether organic or through acquisitions, along with recent process and system – reasons for these changes and their potential to impact client outcomes must be discussed.
Audit and regulatory issues that would undermine the efficacy of the contract or ﬁnancial stability of the Vendor – honesty is very important to build trust.
Client complaints which demonstrate that client servicing is not efficient – these can be hidden, so questions about this should be included in the RFP.
Errors whether current or in the recent past – client confidentiality should not be used as an excuse to shroud or gloss over signiﬁcant errors. Evidence that these errors are fully resolved and operational or technology platforms remain adequate and robust, must be presented to demonstrate compliance with applicable audit and regulatory standards.
Share connections – during courtship couples introduce family and friends. Likewise, the buyer’s BAU management team must be introduced to Vendor’s Relationship Management team (RM), including senior members of the RM, as early as possible. They should all be involved in the due diligence process. This is where responsiveness and technical knowledge can be assessed to conﬁrm that the right calibre of people are assigned to the relationship. Otherwise, frustration will soon creep into the relationship and lines of communication will become strained. As the relationship matures junior employees may need to be included in project meetings, particularly where specialist knowledge is required. Key person risk is to be avoided – BAU Managers need to call out any competency issues early so that the Vendor can address these quickly.
Third-party relationships – to avoid unpleasant surprises a couple discusses pre-existing services or dependencies like childcare or obligations to aging parents. The same can be true of a Vendor who has to service other clients and/or relies on the goods or services of another vendor (third-party). Such pre-existing or potential third-pares must be described in detail during presentations of Vendor work flows. The impact on the buyer’s business of downtime by a third-party should be incorporated into the buyer’s periodic Business Continuity Planning program. Covid highlighted how important this exercise is!
Expectations – couples need to be very clear on what they expect to get out of a marriage and how their personal goals will be met. It is no different for a Vendor relationship. The vendor contract must cover the buyer’s expectations. It must be executed by legal professionals who ensure compliance with local and other regional laws and regulations. It must be unambiguous with key terms properly clariﬁed to ensure no misunderstanding of intent or purpose. The associated Service-level Agreement (SLA) will include metrics (KPI/KRI) to measure accuracy and efficiency of the service, along with remediation protocol and any penalties where service levels drop below the agreed standards. As a couple needs to compromise when life changes, some ﬂexibility may need to be built into the contract to reﬂect the dynamic nature of the industry and business cycles.
Making decisions – ultimately the family head consults with the family before making a ﬁnal decision. In the same way, employees need to know who to consult on BAU and other signiﬁcant matters. There can be a temptation to ring fence senior Relationship Managers of the Vendor from the buyer’s BAU managers, leading to delays in resolving signiﬁcant issues when the buyer’s senior staff are out-of-office. This is bad management practice and jeopardises client interests. An Escalation Policy should be properly documented allowing all BAU Managers access to senior RM. This Escalation Policy should be tested periodically as part of the buyer’s enterprise risk management process.
Use the RFP process, reference site visits, internet research and personal references for discovery … Honesty is very important to build trust.
Doing things differently – as a couple settles into their married life they start to adjust to new ways of doing things. So too employees of both buyer and the Vendor need to adjust their mindset to accommodate the new relationship and working practices. Mutual respect and acceptance of diverse thought is imperative to enrich the relationship. Social interaction is highly recommended to breakdown some of the cultural barriers that may exist. Where teams are dispersed over different geographies, business trips should be built into the cross-training program for key stakeholders to the relationship. Vendor training sessions should be conducted in-person as far as practically possible. Where training is delivered on-line, feedback sessions should be arranged to ensure all understand the key learning points. Training techniques should be adjusted if the desired training outcomes are not being achieved. Employees need to be trained on how to raise queries, answer questions and identify abnormalities in this new relationship. A vibrant communication protocol should not be taken for granted, as this is one of the key ingredients for a strong psychological bond.
Future plans – need to establish one another’s short, medium and long term goals before marriage. Likewise, both buyer and Vendor needs to understand their respective strategic road maps to determine if they are in sync. Unfulﬁlled promises of AI deployment to improve delivery can break the psychological bond and create mistrust in the relationship. Projects like AI development can easily be downgraded as ﬁnancial budgets of the Vendor are diverted to other strategic clients. ‘Buyer beware’!
Like a marriage, vendor relationships can be effective and productive if ﬁrms build a good working relationship based on honesty, trust, effective communication, with a strong psychological bond. It is this psychological bond that makes the Vendor go beyond the letter of the contract to deliver a service that aligns with the buyer’s strategic vision, create a readiness to outperform SLA targets, while implementing change in an agile and collaborative manner to the beneﬁt of both parties. Such a relationship allows the buyer to meet their ﬁduciary obligations, while delivering the desired client outcomes in a timely manner.
Unfulfilled promises can break the psychological bond and create mistrust in the relationship.
As a marriage contract binds two people together and offers certain legal protection, a comprehensive unambiguous vendor contract outlines responsibilities for both parties and stipulates terms under which the agreement can be broken. Vendor relationships are more than a contract. Vendors who respond in an agile, risk adjusted way during times of stress, ensure that the needs of the buyer’s clients are adequately satisfied.
Buyers need to agree realistic performance targets and monitor these consistently to enable Vendors to react quickly to any breaches, while building on good service delivery to enrich the ultimate client experience. As daily operational issues arise, ﬂexibility and change may be required from both parties, not just the Vendor.
Where the Vendor lacks the capabilities to deliver on the contract, obligations will not be fulﬁlled and like a divorce, contract termination will be initiated which could be very costly. This can be avoided if the relationship is right sized at the outset, social capital is injected to create a strong psychological bond and the Vendor does not over promise on trust and effective communication capabilities they cannot deliver or continue to support long-term. A mutual understanding of the growth plans on both sides is essential for a sustainable relationship. Both buyer and Vendor must be in it to win it, with the right calibre of staff to meet expectations.
Rob Knight is a consulting Managing Director who specialises in Operations and Regulations. She is also a NED on the Board of East London Business Alliance.
Rob’s unique professional background spans successful leadership roles within large international businesses, with teams in Asia, Europe, India, UK and USA. Until recently she was Head of Global Business Services at Barings (USD 347B+ AUM), sitting on Barings’ Operations Leadership Team, Pricing Committee and Client Asset Oversight Working Group. She has a keen interest in automation and data science to create more efficient and scalable workflows.
Rob served as Chairperson for the UK Investment Association’s Trade & Transaction reporting Committee until 2022, where she contributed to engagement with European and UK regulators. Prior to joining Barings, Rob was led the fiduciary management team for Citigroup – Asset Management Unit (London).
In 2007 Rob co-founded the award-winning Barings’ See The Possibilities student programme for university and college students. This program introduces students to the financial services industry, while opening doors to entry level Analyst roles.
She holds a MBA, the CFA UK: Investment Management Certificate, and is a member of the Chartered Governance Institute.