Over the last few months, companies have been stressed along their value chains - the steps required to create a product or a service, from conceptualization to reality.
Traditional business processes have expressed fault-lines in their potential to deliver long-term sustainable success in a rapidly digitized world. The survival of businesses has depended on their pre-crisis cash position and their capacity to work remotely. For those that have made it, the strength of suppliers’ client base and owners’ continued access to capital has been key.
Once the virus subsides, there will be a wave of consolidation in capital-intensive industries. Buyers and suppliers will strike a new balance of power — triggering the need for new ways of collaborating within and across value chains to deliver mutually beneficial outcomes and manage spending.
Oil- and gas-dependent economies, particularly in the Middle East, have been pursuing diversification strategies. Localization agendas have been key to attract talent and lift local capabilities, and investments have been predominantly driven by governments and state-owned companies.
Working in alliance, buyers and suppliers - starting in phases as early as the planning and design - optimizes the processes and taking pressure off from capital-intensive businesses along their value chains. In fact, businesses can further ensure continuity by encouraging integration and engagement of the local workforce.
The concept of strategic alliancing has been around for years... but mostly in name. And largely indistinguishable from a joint venture or a friendly buyer–supplier relationship.
Manage downside risks
True strategic alliancing requires radically new ways of working, focused on the core principles of trust and transparency (for example, around costs), alignment in objectives, risk and incentive sharing to deliver a win for all parties. And limiting the downside for the most vulnerable players.
In contrast to traditional contracting, strategic alliances can deliver a range of benefits from more predictable costs, outcome-driven incentives, and a collaborative effort to managing problems early on, streamlining all-party buy-in and reducing scope uncertainty. With an initial upfront effort, strategic alliances unlock additional value early and throughout a project’s life cycle.
Executed well, they bring considerable operational and capital improvements.
All on the same page
However, strategic alliances require buy-in and continued commitment from all parties, and they need to be well-constructed and maintained to drive the right behaviors. If best practices are not followed or if alliances revert to traditional ways of working, the full benefit may not be realized.
Along with a cross-party commitment, the following five best practices can ensure a successful strategic alliance:
* Defining common objectives and the value case, underpinned by a commercial model that incentivizes behaviors toward win–win outcomes. Adopting a "scrum" methodology ensures this alignment by promoting collaboration and transparent ways of working within the alliance.
* Developing a sustainable collaboration model helps create a framework that can be adapted to a regulatory macroeconomic environment and competitive dynamics. Over-investing in governance is essential to ensuring the required transparency and alignment across the alliance members.
* Establishing a new mindset, supported by clear principles to enable the commercial framework to be co-developed across buyers and suppliers. This collaborative mindset fosters a one-for-all, all-for-one spirit in which members of the alliance win or lose together by sharing the risks and the rewards.
* Locking in leadership commitment and buy-in throughout the duration of the alliance ensures quicker decision-making, improved traction, and ownership of the framework. This is essential in allowing the alliance to be transparent and open regarding the cost for suppliers and the value for buyers.
* Having an objective referee help give voice to all parties in the room and support working harmoniously. Ideally acting as the product owner in the scrum team, the referee can ensure that the developed framework creates win–win scenarios for all members. Adopting a data-driven approach helps the referee bring objectivity and auditability to the framework.
One major challenge — and one where a lot of energy is spent — is establishing a commercial framework that can deliver both savings for buyers and superior margins for suppliers limiting the risks exposure for both sides. The only way to reach this win–win scenario is to get rid of inefficiencies in the traditional, siloed way of working.
Squeezing margins out of suppliers doesn’t get you where you want, rewarding good performance does. Developing this framework requires front-end loading, where potential problems can be brainstormed, and solutions iterated to encourage the correct behaviors and create win–win outcomes.
As we emerge from the pandemic crisis, strategic alliancing can provide a template for rebuilding supply chains and jumpstarting capital expenditures. One that recognizes suppliers’ power, but also supports the certainty of costs with transparency and incentives such as outcome-based remuneration and collaboration between buyers and suppliers.
- Igor Hulak is Partner at Kearney Middle East.