Beyond Contractor Management

Why business partnerships are anything but management bs

Beyond Contractor Management

More Than the Sum of its Parts

All of these examples are similar in their outlines of what scientists recommend as the ideal for business and organizational development. “Perfect partners are usually completely dif ferent and not direct competitors,” describes Klaus Götz, Professor of Further Education Research and Management at the University of Koblenz, Germany, in his essay “The Management Concepts of Nature.” If a tree and the fungus that lives on it did not exchange the very products and services they provide, they would both become dominant, which is why they have developed a mutually beneficial relationship.

They communicate directly about the amount and volume with one another and usually both have reserves and other partners, so that in an emergency they can survive without one another. Götz’ conclusion is that inter-company partnerships which bring benefits are symbiotic in character and make both sides more stable and efficient than competitors working alone. Sounds good. So why do managers enter into such constructs so rarely? Over recent decades, modes of working together have been established incrementally – via alliances, framework agreements, cooperations – and yet working together is rarely based on partnerships.

“In the process industry, it’s normal for bigger companies, the corporations, to try to dictate the rules and prices to smaller service providers.”

Frank-Uwe Hess, Chairman and Co-Founder T.A. Cook

An example: a specialty chemicals company is bound to the existing infrastructure service provider at its location in the industrial park. In an attempt to come out of the set-up, without the freedom to choose on the open market, the management team decides to make a five-year contract with the service provider, in which an annual cost reduction of 3% is stipulated.

In return, the company gives the contractor 150 of its experienced maintenance employees. In the contract, it is defined as precisely as possible which activities belong to daily work and thus are contained within the inclusive price, and which activities are classed as “extraordinary,” such as investment measures, which will incur extra costs. Predicting the outcome requires little prophetic skill: even though the contractor began very motivated and had contributed a lot, he comes out of the contract after many years somewhat exasperated. The purchaser had reduced so many tasks in the contract to daily work that he could no longer make any money.

 

PERFECT PARTNERS ARE USUALLY COMPLETELY DIFFERENT AND NOT DIRECT COMPETITORS.


“That is certainly not a win-win situation,” says Hess. On the contrary: in the long-term, both parties lose. The chemical business in the example has only made a short-term financial profit: a large amount of their own know-how and colleagues have left following the liquidation of the contract. The attempt alone to define every single eventuality in the contract is a methodological mistake. Contract theorists Oliver Hart and Bengt Holmström know it well – they won the Nobel Prize in Economics for it. Their specific topic of research is incomplete contracts. Contracts which try to define every eventuality only make everything more complicated, because every eventuality can never truly be defined.

At a Dangerous Distance

And yet, despite such experiences, the dominant model is still the Anglo-Saxon arm’s-length model, in which contractors make short-term contracts at the lowest possible prices and risks are kept as far away as possible. “In many industrial companies, the viewpoint ‘we are the brains of the whole process; our contractors are just carrying out orders’ tends to dominate,” explains Hess.

How powerful those just carrying out orders can become was experienced recently by Volkswagen in its dispute with its supplier Prevent. In August this year, the carmaker had to halt production in several factories for up to seven days – meaning about 22,000 cars couldn’t be built – because ES Automobilguss and CarTrim, companies belonging to Prevent, stopped delivering gearbox and seat components.

Volkswagen and Prevent have been in business together for years. On the surface, the conflict was triggered by the retraction of a development contract by Wolfsburg-based Volkswagen. In the background, however, price pressure also played a part. As the saying “the profit lies in purchasing” goes, so it is quite common in the relationship between Original Equipment Manufacturers (OEMs) and suppliers for the large client to dictate what he wants, in which format, volume and price, and on which date. The supplier is forced to comply – often living on the edge of its existence.

 When it stopped delivering to Volkswagen, Prevent took quite a risk. Other manufacturers will now think twice when considering working with companies which are capable of crippling production. What is clear is that plant operators and service providers often can’t work with or without one another. This fundamental dilemma was described by British economist Ronald Coase in 1932 in his transaction cost model. While studying at the London School of Economics he wondered: If markets function according to the principle of supply and demand, and consumers provide for a price mechanism with goods and services, why do large companies with organizational units and hierarchies exist at all?

Wouldn’t it be far more logical for companies to only buy their primary products and services on the market? His answer was yes and no. On the one hand, the use of a market costs time and money as prices must be compared and contracts negotiated. For every activity that is bought on the market, a variety of economic transactions are necessary which generate costs – transaction costs.

In order to keep these as low as possible, companies prefer to incorporate recurring work into their own structure. On the other hand, Coase established that companies cannot keep growing if they work in this way. The bigger the company, the more secretaries, workers and engineers must be employed and managed by more managers, causing the hierarchy to expand and internal organizational costs to increase. The optimal company size is then exceeded when the additional expenses for internal tasks are higher than the transaction costs for goods or services which are available on the open market.

Dependence Requires Trust

A prominent example of this trade-off was highlighted by the inventor of industrial mass production, Henry Ford. In his desire to control the entire value chain in car manufacturing, he bought a rubber plantation in Brazil, secured ore mines and forests and owned a glass factory, his own fleet of ships, and a railway to transport the finished car. In doing so, the company became so bloated that it was brought to the brink of ruin.

Alas, the economy has become somewhat more complex and interconnected over recent decades than it was for Coase and Ford, and cooperation models and roles have adapted accordingly. Added value in production has moved ever further in favor of technical service providers or suppliers. It is seldom that plant operators in the process industry have their own large maintenance workshops with more than ten trades, from the pump and valve workshop to the electronics and metalworking repair works. As a result, large service providers such as KBR, Bilfinger, Technip, Fluor or Ponticelli have become more than an “extended workbench” – they are now development partners. Plant operators don’t just buy maintenance work from them, but also increasingly, competence and know-how.

In order to make themselves dependent on other companies in this way, one thing is needed above all, and that’s trust – which is where the research by Naomi Eisenberger and her colleagues comes back into play. The ability to feel trust or empathy is dependent on whether the other party belongs to the same social group – for example, football fans trust the unknown supporters of their own team more than those of their opponents. In every encounter with an unknown person, the unconscious swings between friend and foe.

In order to build trust, one must familiarize oneself with the other. Business partnerships must grow just like human relationships, helped significantly by the brain’s production of oxytocin. It doesn’t just have a positive effect on the heart and circulatory system, but also guides our willingness to trust other people. The more oxytocin test participants were given, the more willing to trust they became. What’s more, the more the “other” felt trusted, the more oxytocin they produced in response.

Success Brings People Together

So what is the oxytocin of the economy? “Joint success,” is the answer David Kinch would give. For almost ten years, the Californian chef ran his restaurant Manresa via an exclusive partnership with the organic Love Apple Farms owned by Cynthia Sandberg. Kinch only used products from the organic farm, and was her only buyer. Sandberg also adapted rare and unusual vegetable and herb species solely for Manresa, for which she would have found few buyers on the open market. The unusual partnership was rewarded by three Michelin stars.

“Particularly in the process industry, where contractors mainly deliver services and knowledge and where people are at the forefront of relationships instead of products, single or dual sourcing can make complete sense.”

Frank-Uwe Hess, Chairman and Co-Founder T.A. Cook

 

One way of doing that would be ensuring that a dedicated contractor management process is in place which tries to guide behaviors in a balanced way and to plan and permanently optimize the strategy, processes, steering, training and coaching right from the beginning, together with the service partner. “In this way, the contractor’s defined prices and bonuses can be linked to the operator’s earnings performance,” says Hess.

Beyond Contractor Management

One global oil company has done just that. A recruitment freeze was in place, but the group still needed staff for the planning and project management of an imminent turnaround. The solution? A newly found ed company which could employ the necessary staff, as well as manage their inductions and training. Instead of buying in the necessary knowhow through a range of different contractors, a partner company as set up exclusively to plan turnarounds for the refiner – independent of thirdparty contractor interests.

The contract duration was consciously limited to five years, and following its expiration the recruitment freeze was lifted and qualified employees could be taken on fully by the group. This example also shows that whoever views partnerships which last forever as successful is mistaken. In business life, partnerships often have limited durations and are strongly orientated towards results. When an agreed target is reached, it is still absolutely legitimate to end a partnership and see the end of it as success and not as failure.

Perhaps we should take a leaf out of nature’s book, and as we continue in our business lives, make more effort to build partnerbased networks and learn how to foster and develop them further mutually beneficial. Creating partnerships does not mean that competing interests need to be denied – in fact, it marks an opportunity to satisfy those interests together.

About

Frank-Uwe Hess, Chairman & Co-Founder

Frank-Uwe Hess is Chairman and Co-Founder at T.A. Cook Consultants. After completing his studies for Dipl.-Ing. oec. Frank-Uwe Hess worked as a technology consultant for maintenance and later as a management consultant at PSI GmbH. Since 1995 he is a partner at T.A. Cook Consultants, a management consultancy specializing in asset performance management. His work focuses on the sustainable implementation of asset and operations excellence. His clients are well-known companies, mainly from the chemical and petrochemical industries as well as energy supply.

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