Just like plant, capital and people, inter-organisational relationships are key assets to business.
The quality of the connections between companies is becoming as important as the performance of each company and can significantly influence business success (or failure).
Despite this, executives often fail to assess their inter-organisational relationships correctly and consequently fail to exploit the potential competitive advantage that they offer.
They overspend on their basic relationships and starve more important ones of funds. This is because they don’t differentiate well between relationship types and have a poor understanding of the assessment process.
Transactional vs strategic relationships
Relationships can exist in many forms - from contracts, alliances, projects, programmes, partnerships and joint ventures to outsourcing, mergers, acquisitions, R&D coalitions, licensing agreements and networks. But they can all be categorised by one of two relationship types: transactional or strategic.
Organisations need to have a clear understanding of the difference between the terms transactional and strategic, because most will only have a small number of crucial, business-defining relationships which are typically long-term, mutually beneficial, multi-project and often multi-layered and complex. These will be strategic relationships; everything else will be transactional.
It is important to know how to assess and differentiate between strategic and transactional relationship types to maximise both business potential and the use of resources.
High value or strategically relevant?
In a recent study, companies claimed to be measuring their important relationships appropriately, but very few - no more than one in 20 - were able to demonstrate a genuinely close correlation between the rationale for their measurement approach and the type of relationship assessed. As a consequence, around half were wasting money.
The study revealed that many senior executives were unable to separate high value/financial importance from strategic relevance. This meant that they used the same assessment approach for every relationship, limiting their ability to manage either type of relationship – transactional or strategic - to its greatest advantage.
Three-step approach to assessment
The challenge is to match the assessment approach to the circumstance and optimise the commitment of valuable resources.
Here are three simple steps to help choose an appropriate assessment approach to measure the health of your organisation’s relationships more effectively and maximise the return:
Step 1: Categorise the full suite of relationships
Separate out relationships considered to be strategic from those seen as transactional. The vast majority are likely to be transactional with many, if not all, strategic relationships existing between sister organisations or divisions of the same company. Both types are valid, but not knowing which is which could prove expensive.
Step 2: Work with the transactional relationships
It is neither appropriate nor necessary to measure soft characteristics for contract-centric, transactional relationships. A focus on short-term performance, project progress and safety issues offers the closest match and most economical solution. Separate these out from the others.
Step 3: Work with the strategic relationships
To get the best from strategic relationships, both soft and hard aspects must be measured. Since so many of the softer issues are behaviourally based, both the process used and the metrics employed should reflect the collaborative two-way spirit of the relationship.
It is not the use of a particular approach that distinguishes outstanding practice in measuring the health of inter-organisational relationships, it is the attention given to harmonising a relationship and the assessment approach employed.
This blog is based upon work with Roy Staughton of SHAPE International
Daniel Chicksand teaches on the Operations Management module of the Aston MBA, an intensive programme that immerses students into the principles of strategic thinking in a business context.
The Operations Management module develops your understanding of how your management decisions and the management of resources affect performance. It introduces operations management techniques from around the world, particularly Japanese JIT concepts.
You can study the Aston MBA online. Find out more at www.astonmba.com.
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