The recent article about P&G’s Vested Outsourcing agreement provides an example of how a large firm has used the Vested collaborative business model to drive innovation. Other large companies — including Microsoft, Dell, McDonald’s, and others — have used a similar approach. However, two questions arise: “Is the Vested business model a good approach when working with a smaller supplier?” And, “Will Vested work in other service areas?” The answer to both questions is quite simple: “Yes!”
The WIIFWe Mindset
Following is a Vested case study involving a small business in contract manufacturing — an organization at the other end of the spectrum. RelianceCM is a $ 7.5 million Oregon contract manufacturing lab designed to help startups, emerging businesses, and enterprising OEMs in the high-tech, consumer products, and telecom industries, to name just three of its fields. The firm, based in Corvallis, Oregon, lives by the Vested “What’s in it for We” (WIIFWe) mindset.
I was curious if RelianceCM could leverage the Vested mindset, methodology, and business model to meet RelianceCM’s needs and the needs of his customers.”
Scott Schroeder, CEO of RelianceCM
In 2010, Scott Schroeder, CEO of RelianceCM, read Vested Outsourcing: Five Rules That Will Transform Outsourcing, the first book in the Vested series. “The concept had a deep impact even though our company does limited outsourcing. In fact, RelianceCM is at the other end of the contracting spectrum, doing prototype projects and production assembly for other companies. I was curious if RelianceCM could leverage the Vested mindset, methodology, and business model to meet RelianceCM’s needs and the needs of his customers.”
Schroeder decided that the best fit for his company was to select a couple of customers and forge WIIFWe relationships with them. It has taken some time for RelianceCM to find the right kind of current and new customers to negotiate WIIFWe relationships. Simply put, he looks for the right fit. Does the customer align with RelianceCM’s cultural mindset? If not, it may still be a good fit for contract manufacturing in general, just not for a WIIFWe partnership.
It is impossible to have a one-sided collaborative relationship. The companies have to agree on the underlying WIIFWe mindset and a shared vision for it to work. It doesn’t have to take endless discussions over weeks and months to get to an agreement on the shared vision and the guiding principles that will form the foundation for the relationship. It can happen quickly, and typically, for Schroeder it happens over the course of several conversations.
Transparency and Trust
Referring to a relationship with a current customer, Schroeder says, “We both agree to be transparent. We share target costs and needs issues within each company. It’s like having a chat with your best friend. There is no defensiveness when discussing difficult questions. We share data and the method behind the numbers. We openly question assumptions.” This transparency and openness has built trust between RelianceCM and that customer who happens to be a startup.
RelianceCM has seen a significant improvement in the quality and size of its clients using this approach. The largest example is a client that generated $4 million in annual revenue, and it took only four months of nurturing to close the deal.
Schroeder explains the importance of transparency and trust. “The nature of a startup can bring high risk of not getting paid to a contract manufacturer. This can be very scary for a small business like RelianceCM. In one situation, we were working with a customer that was pre-revenue and still working out the bugs in the product when they reached out to RelianceCM. We were cautious about extending credit.”
A key problem was RelianceCM’s offshore suppliers wanted 100 percent prepayment on millions of dollars’ worth of materials. This created a cash demand that RelianceCM was unwilling to finance. Schroeder adds, “We simply could not move forward placing orders for these materials. The project stalled as a result.”
But a trusting and transparent relationship made all the difference, Schroeder comments. “Often, the relationship would have ended at this point. Due to the developed trust, a solution was created going beyond traditional win-lose. We knew through our conscious effort to develop a foundation of trust that the founders of the startup proved to be straight-up people who did what they said.”
Schroeder continues, “As a company, RelianceCM felt very comfortable sharing our cash forecasts for assembling their product. The level of transparency provided a clear picture of where and when the cash flow was not sustainable. The solution actually proved to be quite easy. The customer agreed to pay up front for the offshore materials and we provided payment credit terms. In addition, RelianceCM improved the project cash flow by negotiating favorable delivery terms with the offshore vendors. It was a classic textbook example of WIIFWe.”
Forging Longer-Term Relationships
RelianceCM has seen a significant improvement in the quality and size of its clients using this approach. The largest example is a client that generated $4 million in annual revenue, and it took only four months of nurturing to close the deal. Normal nurturing time for RelianceCM is eight to 10 months and the average client size runs around $275,000 annually. Client size using the WIIFWe approach is $300,000 to $400,000 annually.
Schroeder also notes that RelianceCM is finding the WIIFWe clients prefer longer-term relationships. “We decided it would be really helpful to create a Vested-oriented MSA (Master Services Agreement) to cover the long-term issues as well as defining the rules of governance. As a CEO, it is comforting to have a commercial structure that aligns with our truly collaborative and trusting relationship. We are not just working to ‘say’ partnership — but have truly embedded the concept into our agreements, which have helped us transition these types of relationships to more collaborative, value-sharing and outcome-based models, compared to transactional,” says Schroeder.
Companies large and small are discovering something essential: the secret to a good business deal is negotiating and nurturing relationships in order to deliver a sustainable competitive advantage for everyone long after the initial deal is signed
“A Vested approach allow us the freedom on flexibility as well. It is important to maintain flexibility for the benefit of its customers. Once RelianceCM understands the client’s thinking, we look at the total picture to reduce costs. We may change the scope of the project or remove an unneeded step in the process to reduce the price without taking advantage of the supplier,” explains Schroeder.
Schroeder is enthusiastic about the results of his efforts to establish Vested’s WIIFWe mindset with select clients. Schroeder says RelianceCM would not have achieved the success it has without, in effect, negotiating the relationship through the WIIFWE mindset. Just what has been the impact? The company doubled its revenue in the first year from the clients it chose to work with differently.
Companies large and small are discovering something essential: the secret to a good business deal is negotiating and nurturing relationships in order to deliver a sustainable competitive advantage for everyone long after the initial deal is signed — whether it’s with a large company like P&G or a small supplier like RelianceCM. Bottom line, collaboration and trust create value and make the pie bigger for everyone involved.