Stakeholders at stake?

Mismanagement of organisations has put the interests of all stakeholders at stake

A common growing pain point across the entire stakeholder community (minus on roll employees and shareholders) is that they are consistently mismanaged by the organisations they serve. In reality, the organisations have only given fancy names to the suppliers such as ‘vendor’, ‘partner’, ‘stakeholder’ and so on. But the value has not changed in proportion the meaning of the name tags.

Day in and day out we see a growing conversation gap within an organisation’s own departments and the suppliers have to pay the price for this. It is still an unsolved mystery that the “purchase” department, now fashionably called “procurement” or “vendor development” is kept aloof to the developments and are suddenly brought in to play a cameo of a villain, the supplier is suddenly put across this department and the staff of Purchase start the discussion as if they are IB/CBI sleuths – it’s more like FIR interrogation rather than a value conversation. The only points discussed are discounts and extended credit period with immediate supplies.

I remember a reputed German MNC in Verna asked one of my fellow service providers a credit of six months – that too, after reducing the margins to gasping levels! Ironically, the employees of the client organisation needed their salaries on time every month irrespective of their performance or contribution.

There was another incident where the MNC had already zeroed in on a supplier but since the auditors questioned the monopoly they rushed to get two more “quotes”. The poor suppliers who gave the quotes with hope of business, kept chasing them for three months only to receive the answer that, “We found another vendor much better than you.” When demanded on what parameters, the phone was disconnected.

The next torture starts with a ceremony called “vendor registration” which has several irrelevant clauses not applicable but are never customised, so again the supplier has to engage into RNVA (Required Non-Value Added-Activities); and with a slim staff to support, this becomes a major time waster.

After this, one has to endlessly wait for a work order; and by that time the department which has placed the requirements starts chasing the supplies. It is a Catch-22 situation – if you supply without a PO/WO (Purchase Order/Work Order) you will be in soup, god forbid if someone from the organisation quits or there is an audit – you are lost and totally at the mercy of the client organisation. Also by that time you have to pay GST because you have raised an illegitimate invoice. Now, on the other hand, if you wait for a PO and delay supplies, it could have a major impact on the process and you would be blacklisted.

In the case studies, I have mentioned, the poorest connect lies between the HR and Purchase Department, both at an intellectual and emotional level. When a consulting or training proposal goes to the procurement team, they directly ask you for a discount, because they don’t understand the nature of work involved, as the majority of their dealing is with tangible goods.

Hundreds of suppliers and service providers have shared that when it comes to commercial negotiations almost all organisations crib about the market slowdown. What baffles me is if a client organisation is going through a bad phase then the first patriotic gesture should be demonstrated by their own employees. I am yet to see an HR head or Purchase Head who volunteers for his/her salary reduction to salvage their own organisation. It definitely looks like this ‘value’ is also outsourced to the suppliers.

Organisations who have knowingly and unknowingly ill-treated their service providers have never been consistent in their success, profitability and value proposition. At first glance, this may seem counterintuitive – until you look at a business as an ecosystem comprising of groups that cooperate to maximise value creation and compete to realise their share of that value.

No system can thrive if one member group continually benefits at the expense of others. Any unfairness in treatment will result in suppliers prioritising other customers, cutting corners, resorting to unethical practices or even extreme steps of shutting down. Now with a major focus is given to start-ups, this could have a catastrophic effect on the strategy of building entrepreneurs.

In this context, the strategy is the art of balancing how value is shared among different stakeholders so that overall value creation is maximised. Its aim is then to sustain superior profitability over the long run rather than maximise it in the short term.

There are a few improvements and value corrections a client organisation should ensure:
1. Value integrate your organisation
Hold sunrise meetings with all the departments at least once a week to appraise each other not only about work but also appraise about the suppliers and the value they bring, their operational constraints, what support they would need rather than treating them as punching or dumping bags.

2. Create a value proposition for each supplier group
This should be specific to the sub-group you are targeting and will detail how you will create value for that group. Typically, there are three dimensions of value – financial (price, volume, margin, RoI, etc.); functional (increasing suppliers, productivity, providing choice or flexibility, being easy and convenient to do business with, and delivering speedy service); and emotional (providing security to generate trust and stimulating a feel-good factor). All of these can be offered in some form to each supplier group.

This value creation for each supplier group needs to be balanced by what the business will gain in return – the value it will extract from the relationship. Determine what you are seeking from each supplier beyond the traditional mindset of buy and sell the typical roadside purchase.

Knowing what value you want to offer, and what you hope to get in return, will allow you to identify what stakeholder-facing capabilities you need in order to execute. Compare the capabilities you need with those that you already have to highlight any gaps. You will have to fill those gaps in through organisational re-design, training, process development, systems implementation and cultural change.

Track the costs and benefits associated with each value proposition, including the investment necessary to complete the initiatives required to fill the capability gaps that you’ve identified. Use this information to create a profit model to manage the inevitable trade-offs among your stakeholder groups.

You may not be able to afford all the things you would like to do, but the profit model becomes the means for managing competing interests and the returns provided to each stakeholder group – the output being your financial returns (which are central to the value proposition to shareholders).

Finally, you need to determine a set of key performance indicators. These should track how effectively your business is creating value for each stakeholder group and how well you capture value in return. This will enable you to develop a stakeholder scorecard that provides a 360-degree view of performance.

Defining the value created for and from each stakeholder group adds perspective, ensuring that you look at your business from all angles. And by focusing on value creation for all your different stakeholders, you will be a creating a business that is more sustainable – in all senses of the word; not only for you but for your suppliers as well.

However, this calls for the unit head/CEO to engage in “management by walking around”. Having frequent interactions with suppliers both active and potential, the organisation’s claim for “vendor development” will be just a paper tiger; more so with the growing percentage of outsourcing and start-ups. It is high time that we stand for the betterment of the suppliers and this should be the major focus of CSR, else the fate of the stakeholders will always be at stake!

I wish associations like GMA/NIPM/NHRD would take this as one of their value causes and create a much-required business ecosystem