Yesterday, I said that Connie Customer and Sam Supplier are trying to build a long-term business relationship.

Why would Connie and Sam want to do this?  In today’s business environment, that is a great question and the question that will launch this discussion.

There are a variety of reasons that Connie and Sam might benefit from having a long-term business relationships.  As will be discussed in this article and in the book that I am currently writing about building business relationships, long-term relationships can help firms with regard to:

1. Cost
2. Ease of use
3. Predictability
4. Referral opportunities
5. Streamlining administration
6. Capitalizing on existing synergies 

Our discussion begins now with consideration of the theory.  Tomorrow, our discussion will aply the theory to the facts presented in this series.  As always, please feel free to pose questions or suggest other ideas. 

Cost

If the parties begin a new relationship, there are a variety of direct and indirect costs associated with the new relationship.  One of the most obvious costs is simply the out-of-pocket cost associated with implementing a new agreement.  By building a long-term relationships, the costs of implementing new relationships might be eliminated.  The context determines what costs are associated with implementing a relationship. 

Modify other relationships.  Often, firms purchase products and services for resale and bundle those items with items provided internally or from third parties.  When a new relationship commences, the other relationships may require modification.  Depending on the circumstances, this can result in cancellation charges, charges for terminating agreements, higher unit prices, and a need for other suppliers.   

Secure equipment and personnel.  When a relationship begins, it is often necessary for the parties to obtain additional equipment and personnel to meet the obligations under the new contract.  By entering into a long-term relationship, the parties are able to seek lower cost options (such as purchasing equipment, rather than leasing it or enter into longer-term leases which often have a lower cost for a given unit of time). 

As it relates to personnel, people may be employed, rather than contracted with and temporary staffing may be avoided when a longer-term relationship is involved.  Often, employees are available at a lower charge than contracted individuals or temporary staffing firms would charge.

So too, storage space, office space, training, and travel may be increased to support new relationships.  Those costs can be spread over the life of the contract to reduce the annual cost. 

Other Costs.  Time is often the largest cost associated with negotiating a relationship itself.  It can require weeks and months, sometimes years, for people to develop a relationship that meets their needs.

Ease of Use

In addition to cost, having a long-term relationship simplifies use for the customer.  When a new relationship is negotiated, it can take tremendous amounts of time and communication to educate the audience about the new relationship, what is required, the scope of the relationship, the costs associated with the products and services, and what to expect. 

At times, transitioning from one relationship to another is a bit like trying to stop a battleship on a dime.  It takes a lot of effort to change suppliers and it is often easier to stay with the supplier that is already known.

Although this article is written in terms of “long-term” relationships, that might mean one year, three years, five years or more.  The phrase is intended to suggest a relationship that is expected to be on-going, although performance and needs of the business may justify a change in plans. 

Predictability

Imagine what would happen if a firm consistently charged different prices for the same services.  Suppose that the customers were greeted with different terms each time they purchased a product or service.  If these conditions were to exist, how would Connie and the millions of other firms in the US ensure that they were in compliance with their contracts?  How much would that cost?

Knowing what to expect and how to work with the other party to a contract makes it easier for firms to work together.  When a new relationship begins, the parties may “speak” different languages and have different expectations.  Over time, if they grow to know each other, the firms learn what to expect and what is expected of them.

Predictability has a lot of business in business.  It allows customers to focus on their businesses and suppliers to focus on theirs.  From time to time, adjustments are needed, of course.  On a daily basis, firms are able to concentrate on their core competencies, rather than worrying about whether the other parties to their existing relationships are going to fulfill their contractual obligations.

Referral Opportunities

When suppliers and customers build strong relationships, the relationships often lead to referral opportunities in the contexts of suppliers, customers and employees.  Even students at a local community college talk about job opportunities, suppliers, and customers.  Word of mouth advertising like this is common when parties in a relationships know and respect each other.  Just as referrals from others is a valuable way to select doctors, accountants, and attorneys, so too it can be used to select other suppliers. 

Streamlining Administration

When each contract is unique, compliance with the contract terms imposes a significant administrative burden on firms.  Consequently, limiting the number of separate agreements helps firms control their administrative costs. 

Capitalizing on existing synergies

The parties in a relationship usually have a shared interest in the relationship continuing and, in many cases, growing.  Allowing the relationship to expand to areas that are of interest to the parties allows them to capitalize on the parties’ synergies and to help each other have a more successful relationship.

Filed by Coleen Davis at 8:49 pm under Negotiations, Planning Tips, Solving Problems