Identifying, Developing and Managing Service Alliances

Author(s):

Larry R. Smeltzer, C.P.M.
Larry R. Smeltzer, C.P.M., Professor, Arizona State University, Tempe, AZ 85287, 602/965-6824, larry.smeltzer@asu.edu
R.G. Roberts III, C.P.M.
R.G. Roberts III, C.P.M., Alliance Manager, SONAT, P.O. Box 2563 Birmingham, AL 35202, 205/325-3810, Robby.Roberts@sonat.com

83rd Annual International Conference Proceedings - 1998 

Abstract. As alliances grow in number and importance, opportunities for service alliances should not be overlooked. Much of what is true about alliances for materials may also be said about alliances for services; however, differences also exist. Or it may be said the extent of certain conditions vary. Selecting potential service partners may be much more of an art than materials partners. Service alliances also differ in that fewer potential supply partners may be available; consequently, suppliers may have to be developed. Evaluating performance may be more complex as well. Finally, obtaining end-user support of the alliance may be a greater problem with services than materials. These and other differences between material and service alliances are considered in this paper. Suggestions are also provided for identifying, developing and managing service alliances.

Overview. The past decade has seen a tremendous amount of attention given to buyer-supplier alliances with suggestions provided for developing (Ellram, 1995) and maintaining them (Landeros, Reck and Plank, 1995). Various models have been developed (Stuart, 1997) and cases presented (Stuart and Mueller, 1994). However, this and the related literature generally does not include service alliances in its discussions. And few examples of successful service alliances have been provided.

But service alliances are an important consideration for many purchasing managers. A study conducted by the Center for Advanced Purchasing Studies (CAPS) found that over half of the purchase dollars were spent for services (Fearon and Bales, 1995). Also, an article in a leading business magazine has made the argument that organizations spend more for services than for goods and many opportunities for increased efficiencies exist (Tully, 1995). Alliances are a strategy that deserve consideration in many organizations for increasing efficiencies in the purchase of services.

Differences Between Material Alliances and Service Alliances. Many of the guidelines and suggestions for buyer-supplies material alliances may also apply to service alliances. However, several significant differences exist.

Selecting service alliance partners may be more of an art than is the case with materials alliances. Why? Problems or variances in quality may develop to a greater extent from one delivery to another. The most commonly mentioned special attribute of service deals is that they cannot be stored (Leenders and Fearon, 1994). Consider a service like catering. Each services is only as good as the current one. Even if the caterer has a great reputation, that makes no difference if the quality of the food for a particular event is poor. And the special problem with services is that by the time of delivery, it may be too late to do anything about poor quality. So selecting service alliance partners is an art because the entire capabilities of the supplier must be evaluated rather than just the tangible material outcome. The purchasing manager must be able to assess future capability as much as past performance of intangible services. In many instances this means that the processes leading to the outcome must be evaluated in addition to the actual outcome.

Another consideration is that the services likely are geographically limited to the area in which they are generated. Materials may be transported worldwide, but this is not the case with many services. As an example, consider a building maintenance service which has a limited geographic area it may serve.

Because suppliers in a local market must be used, it is possible that only a limited number of suppliers are available or sole source situation exists. Furthermore, the available suppliers may not have the interest or capability of being an alliance partner. This means that a purchasing manager may need to become a salesperson or a business development manager.

Purchasing managers become salespeople in that they must convince the potential alliance partner about the value of a service alliance for both the buyer and seller. In many instances, this means that the supplier will need to be educated about the nature of long-term alliance relationships. Selling suppliers on the value of alliances may be an especially awkward role for many purchasing professional but it is the reverse of what they are accustomed. They must "reverse market" a process.

Purchasing managers may need to be a business developer when no available suppliers have the expertise required to reduce costs while improving quality. In this situation, the buyer may have to assist in developing the service provider's expertise. Supplier development has proven to be successful with material suppliers so it should also be considered with services (Krause, 1997). In one instance, no supplier was available with current expertise in Windows NT maintenance; consequently, the buyer had to help arrange extensive training for services supplier along with the purchasing organization.

Another consideration is that measurement may be more difficult with a service alliance than a materials alliance. This is true for several reasons. First, services are frequently intangible. How is it possible to objectively measure legal services? Second, some services contracts such as hazardous waste are extremely complex and difficult to objectively measure. These differences between service and materials alliances lead to the following suggestions.

Suggestions for Service Alliances. The following seven suggestions for identifying, developing and managing serviced alliances are presented with the understanding that service alliances are different than materials alliances. However, it is also understood that many different types of service alliances develop so these suggestions must be adapted to individual situations.

1. Identify suppliers that can benefit from an alliance. The unfortunate reality is that many buyers look at potential alliance from only their own perspectives. Both the buyer and supplier must benefit from a service alliance. In many instances, the greatest benefit obtained by a supplier is that labor may be better utilized because the buyer can assist with forecasting demand. As a result, labor will not be idle for extensive periods. Another advantage to service alliances is that the supplier may train employees for procedures specific to the purchaser. In the long run, this reduces training expenses and increases efficiencies. But the main point is that it is essential to find suppliers who will benefit from the alliance so that they will be motivated to assure its success. And it may be necessary for the buyer to specifically point out the advantages to the supplier.

2. Develop a total cost model. The purpose of an alliance is to increase overall efficiencies...not to simply reduce prices. But the cost savings may not be possible to identify unless a total cost model is used. In many instances, however, the service provider is a small firm. In these situations, it may be necessary for the purchasing organization to assist the smaller firm to develop a cost model. In addition, a cost model used for materials must be adapted for services. As an example, a computer/printer manufacturer assisted a repair company to develop a cost model that helped identify over thirty percent savings.

3. Clearly identify the roles of both parties. Both parties must be clear on which company and precisely who within the company is responsible for the various alliance activities. For service alliances, the major responsibility may include the approval of variances; therefore, it is important to know who may approve last-minute variations from previously stated conditions.

Another important role is supplier performance evaluation. In a materials alliance, the product may be physically inspected to objectively evaluate performance. But his is not the case with services as performance evaluation may be quite subjective. Because it is subjective, it is important that the supplier understand evaluators' biases and how best to work with them.

4. Develop evaluation measures. The easy thing to do is to simply analyze price, but other evaluation measures also must be developed. Quality is difficult to measure in tangible materials, but is even more difficult with intangible services. Take the example of painting. Does the purchaser imply look at on-time performance and cost? No, other measures must be developed that assess such items as material use, cleanliness, interruptions of surrounding work activities and appearance of final outcome. Often these measurers are subjective so it is helpful to develop a check list to assist the process.

These evaluation measurers should ideally be developed jointly by the alliance partners. Each party likely has differing expertise and perspectives. Joint collaboration on the development of the measures will assure that the parties take advantage of the expertise and consider both perspectives. Furthermore, the measures must be easy to use. They cannot place such a burden on the supplier that they cost too much to develop.

Purchasing managers naturally want many performance measures to justify the worth of the alliance to top management. Sophisticated tables and charts demonstrating reduced costs, increased quality and reduced variances can be valuable. However, a tradeoff exists in that service providers are often asked to provide the measures...and they take time and money to generate. So purchasing management must decide which measures are most valuable without making excessive demands on the suppliers.

5. Establish formal communication systems between both parties. They key here is "formal." The best of intentions may soon be lost if a formal system is not established. One possibility is a quarterly meeting to review the strengths and weaknesses of the alliance. In one situation, alliance manager from both parties were responsible for writing a quarterly newsletter circulated to all relevant parties.

Again it is important to emphasize that the communication procedures should be formally agreed upon early in the alliance discussions. If they are not agreed upon in a formal manner, the possibility exists that the communication will gradually fad away. A general statement saying that both parties believe in the importance of communication is not sufficient. Formal communication is especially important with services because service conditions and standards may vary from day-to-day. It is important these variances are understood by both parties.

Another object of formal communication is to continually update and educate the ultimate users about the alliance. Many employees in the purchasing organization, as well as internal customers, may initially resist the alliance as it takes away some flexibility...a specific supplier must be used. A favorite, local supplier may be eliminated in many instances. But if all employees don't operate within the conditions of the alliance, it may soon lose its effectiveness. So it is important that users fully understand the reason behind the alliance and the conditions within it. The formal communication may be used to remind users about the alliance and gradually eliminate "backdoor" buying and selling.

6. Continually evaluate service performance. As mentioned earlier, the service is only as good as its last performance. As opposed to materials, services cannot be put on the shelf. Every service is generally independent of each other and may require independent evaluations. Quality within a service production run is not as consistent as it is for material production.

This recommendations is highly related to the previous guidelines of measurements and formal communications. Evaluations require measurements that must be communicated among the parties. And in most situations, the more frequent the evaluation the better.

But a balance must be obtained on the number and complexity of evaluations. If too many evaluations are conducted, the supplier may begin to believe that the buyer is always "looking over my shoulder." Here again is a primary difference between a service and material. The service provider is likely being directly evaluated...it is much different evaluating people than a product. If the evaluation is too frequent or complex, resistance may result. And inapprropriate evaluation may erode trust.

7. Develop problem solving and dispute resolution procedures. No alliance is without some problems. More than likely, measures will indicate that some alterations are needed. In addition, cost saving amounts may be debated. If both parties know they have a vehicle by which their concerns may be heard, they will probably be more willing to express their viewpoints and suggestions.

And problem solving is a natural part of continuous improvement. It is best to admit that problems will develop. As the alliance develops, a formal problem solving mechanism may develop procedures for further reducing costs or expanding services.

When problem solving comes to a stalemate, arbitration may be needed. One of the more valuable techniques is to develop a third-party arbitration board. This may be made up of someone from the American Arbitration Association, members of a local NAPM chapter or a university professor. The main point is that it can be done economically. The mere existence of a board may reduce conflict.

Summary. Each of these recommendations are designed for service buyers and suppliers to work together to reduce costs and share in the benefits. But it is also important to recognize that certain risks also exist with any service alliance. However, these suggestions should help reduce the risks while increasing rewards.

One final thought: Although many similarities exist among material and service alliances, differences also exist. An awareness any management of these differences will help develop effective service alliances. The suggestions presented here should assist with service alliances; however, it is important for the parties involved to continually seek collaborative innovations.

REFERENCES

Ellram, Lisa M., "A Managerial Guideline for the Developing and Implementation of Purchasing Partnerships." International Journal of Purchasing and Materials Management. Spring 1995, pp. 10-16.

Fearon, Harold E. and Bales, William A., Purchasing of Nontraditional Goods and Services. Tempe, AZ: Center for Advanced Purchasing Studies, 1995.

Krause, D., "Supplier Development: Current Practices and Outcomes." International Journal of Purchasing and Materials Management; Spring, 1997, pp. 12-19.

Landeros, R., Reck, R., and Plank, R.E., "Maintaining Buyer-Supplier Partnerships." International Journal of Purchasing and Materials Management. Summer 1995, pp. 3-11.

Stuart, Ian F., "Total Quality Management and Supplier Partnerships: A Case Study." International Journal of Purchasing and Materials Management. Winter 1994, pp. 14-20.

Stuart, Ian F., "Supplier Alliance Success and Failure: A Longitudinal Dyadic Perspective." International Journal of Operations and Production Management. Vol. 17, No. 6, 1997, pp. 539-567.


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