I can recall being on vacation in Hong Kong with my wife as we were walking through the famous shopping district in Mongkok. Here you can buy Class A imitation goods of leading brands at far lower prices than the real brand and few would ever know the difference. Or, if you are like me, you will negotiate (aka: haggle) for an even better price. As I plied my finely honed negotiating skills on the unsuspecting merchants, the price kept getting lower and lower. My wife would say, “Stop, stop already” and she would eventually walk away in embarrassment.
All too often, businesses are faced with bold promises about the services they will receive from their outsource providers; they are drawn in by the “ideals” pitched to them and ultimately, find themselves disappointed with the outcome as those services fail to live up to expectations.
The days of paying supply chain outsourcers by number of FTEs are on their way out. In that purely cost-based model, the OEM’s interests – keeping hours low to contain costs – are inherently pitted against their managed service provider’s – putting more FTEs on a project to maximise revenue. Instead, OEMs are now exploring outcome-based models, where sellers become partners who share the risks and rewards of achieving their goals.
At some point a buyer and supplier will talk about pricing, maybe not right away – but it’s always the elephant in the room. Pricing is also potentially the most volatile topic, and could be a deal-breaker if the negotiation is not handled correctly.
It is likely that no other subject gets as much attention when two companies are entering, or extending, their outsourcing business relationship as the effort to come up with a fair pricing structure. Money is money after all, and money talks. You know the drill by now: the conventional procurement process pits buyers and sellers on opposite sides of the table – and there’s no way around it, right? Wrong!
I’ve been a game theory fan for many years, particularly as it relates to showing that cooperative behavior indeed creates true “win-win” situations. So I was excited to read a work of University of Pennsylvania professors Alexander J. Stewart and Joshua B. Plotkin, ‘From Extortion to Generosity, Evolution in the Iterated Prisoner’s Dilemma‘, published recently in the Proceedings of the National Academy of Science (PNAS).
If your recent experiences with new or renewal contract negotiations are something akin to visiting the dentist for a root canal, we’d like to introduce you to a much better – and pain-free! – way to go about negotiating. It’s called Getting to We: a five-step process for crafting business relationships with the intent to drive collaborative partnerships.
What can a professor who teaches democratic theory tell us about collaborative, non-coercive business and outsourcing relationships?
Next up in my series of columns about the great academic thought leaders who were seminal in the development and success of modern outsourcing are two of my favorite game theorists: the mathematician and Nobel laureate John F. Nash, who took economists a step or two beyond Adam Smith with his ideas on game theory and the art of collaborating, or playing together nice, for the win-win; and Robert Axelrod, who verified the beauty of cooperation through his early work with computers to solve a classic game theory behavioral experiment.
This week’s column focuses on big thinker Ronald Coase. Coase, a giant of modern economic science and 1991 Nobel laureate helps us understand a key fundamental of business: that business (and outsourcing decisions) are a math problem.
While outsourcing has been in the limelight for some 20 years, various threads of economic thought and research stretching for more than 80 years planted the seeds of modern outsourcing, centering on growth theory, transaction costs, game theory, property rights, deregulation and the nature of the firm.