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Squeeze Now, Pay Later

Squeeze Now, Pay Later

There's nothing illegal or immoral about squeezing suppliers. It can be an excellent business practice

The only leverage vendors have left in a hostile economic environment of cost-cutting, cutbacks and outsourcing is in the service, support and implementation side of the process ledger. The CIO challenge here is TCI - total cost of implementation - more than TCO. After all, open-source software is ostensibly free. The devil is in the details of implementation. If we save 50 per cent in purchasing and procurement at the cost of doubling our service and support overheads, what is the net benefit?

The ultimate issue here has less to do with squeezing suppliers than segmenting them into those you partner with and those you can safely exploit. It's no accident that companies with hugely successful business models - let's pick Wal-Mart, Dell and Toyota as the best examples - have built their global pre-eminence in large part by insisting on supplier transparency. Wal-Mart knows the cost structure of its suppliers perhaps better than the suppliers do. Wal-Mart doesn't hesitate to make suggestions to suppliers on how best to conform to Wal-Mart's everyday low pricing ethos.

Similarly, Dell - with virtually no R&D budget to speak of - works intimately with its key suppliers to ensure that they understand what kind of costs and designs are compatible with Dell's build-to-order direct-business model. Dell knows its suppliers' costs. Toyota is famous for sending production consultants and design engineers to its first-tier suppliers. Toyota knows its suppliers' costs too. Supplier transparency is at the core of Toyota's successful working relationships. Suppliers that can't - or won't - be open to information and cost sharing are gradually weeded out.

There's an important lesson here. In the recessionary 1980s, General Motors created a procurement czar who used his company's massive buying power to beat up suppliers on price. The world's largest automobile company earned enmity, horrible relationships and a reputation for building cars that underperformed. By contrast, a desperate Chrysler couldn't bully its suppliers, so it partnered with them. The feisty company pioneered the concept of "gain-sharing" with its suppliers; that is, Chrysler would let suppliers keep a significant portion of the margins when suppliers came up with innovative ways of cutting costs and adding value. Strong supplier relationships were at the core of Chrysler's corporate comeback.

I'm not a Pollyanna, and I don't believe that companies should always partner with their vendors. Indeed, some vendors - particularly those in the software realm - would probably find it easier and cheaper to cut their prices than invest in what it takes to be a good partner with the customers.

Similarly, the reason why CIOs squeeze suppliers is that, frankly, it's easier than partnering with them. Then again, buying a box is easier than maintaining and upgrading it. CIOs have a business obligation to determine whether the economics of partnership will prove a better investment than the economics of squeezing suppliers. If we really care about successful implementation, CIOs need to respect the reality that even the most artfully negotiated service-level agreement can't withstand the fact that a vendor has no ongoing business rationale to honour it except avoiding a lawsuit. Incentives matter. Don't let the procurement squeeze crush the opportunity to profitably partner.

For a local perspective on how CIOs deal with squeezing vendors, see "Can You Deal with IT?", CIO July. - ed

Michael Schrage is codirector of the MIT Media Lab's eMarkets Initiative. He can be reached via e-mail at schrage@media.mit.edu

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