Benefits of Relational Contracting

In a study by the US Air Force and co-authored by professors from The University of Tennessee, Auburn University, and the University of Alabama, demonstrated how US department of defense could save billions of tax dollars by exercising what they called “relationship contracting”.  The report recommended that rather than looking at contractors as adversaries, the Air Force needs to learn from private industries where companies like Proctor and Gamble who collaborate and work closely with their vendors and suppliers.  According to the study, Proctor and Gamble has been so successful at working with their suppliers that “Procter and Gamble’s executives now believe that half of their firm’s innovations can arise from ideas provided by supplier”.  In other words, the suppliers are not just execution machines.  They are part of the innovation process. 

The same exact principles that will save millions of dollars for the US department of defense can also be applied to the marketing world where agencies rely on numerous vendors to ensure they have the talent and bandwidth to deliver for their clients.  The natural instinct for most marketing agencies to save money is to “projectize” their needs then send it out for quotes from multiple vendors.  For many firms, company policy even dictates that everything must be “triple bid”.  It’s basic Econ 101, right?  The more competition you have the better price you get and therefore more profits.

Using that method you may ensure you get the best price but you certainly did not guarantee you will get the best results.  This is because having vendors constantly compete with each other in this manner has many drawbacks. 

  1. Once you account for the overhead in managing this process, you may not be saving any money at all.  From assembling and organizing your needs to answering vendor questions, your cost saving can turn out to be marginal when compared to working with a single trusted partner
  2. You are not going to get an apples to apples comparison.  Each vendor will have their own set of assumptions and understanding of the scope.  A lower price may just mean that a vendor has a poor understanding of the work involved and has priced it improperly.  Worse yet, many vendors aim for the lowest price and hope they can change request their way to profitability.
  3. Perhaps the most important drawback of all is rather than helping the agency come up with the best solution, vendors are asked only how they will deliver a preset list of requirements. That’s a lot of brain power that is not being utilized to help Agencies provide the best service and solution for their clients.

From helping to our agency partners with proposals to generating new campaign ideas, Bedlam goes beyond project delivery. This is why agencies such as Quigley Simpson, Deutsch, and M&C Saatchi, have all entrusted Bedlam to help guide the digital strategy and implementation for some of their most important clients.  These partnerships did not happen overnight and require a mutual level of trust.  But given the great results that these partnerships have produced, “relational contracting” is here to stay.

Source Article:
http://www.utk.edu/tntoday/2012/07/10/study-suggests-ways-pentagon-cut-billions/