By Ian Heptinstall and Eli Schragenheim – a collaboration between two TOC experts
This article is broadly based on a mutual webinar at TOCICO. We have found out that the topic is of special importance and ought to be expressed in more than just one way.
People often collaborate with each other. Family, ideology, security and business are good objectives for collaboration. When the candidates for collaboration trust each other it makes win-win easier to achieve. Win-win is necessary for maintaining long-term collaboration. Sometimes we have to collaborate with people we do not trust. It happens when a mutual pressing need makes it mandatory to overcome the distrust.
Collaboration between different organizations is harder to establish. The simple straight-forward relationships like: “we buy from you and we pay according to agreed pricing and related conditions”, is more about “cooperation” than “collaboration”. Cooperation needs to be present in most of our organizational relationships, whereas collaboration – where we have some mutual goals to achieve, and we need to ensure we both find a win in what we do – is rarer.
There are obvious difficulties in maintaining ‘trust’ between organizations. We can trust a specific person. While any relationships between organizations are handled by people, the obvious concern is that those people might be replaced or be forced to act against the spirit of the collaboration.
However, collaboration could open the door to new opportunities, even creating the desired decisive-competitive-edge, for at least one of the sides, while improving the profitability of the other. Collaboration between competitors could strengthen the position of both towards the other competitors. Collaboration between vertical links in a supply chain could improve the whole supply chain, and if all the links in a supply chain would collaborate effectively then the overall decisive-competitive-edge would be hard to beat.
So, we should look, first of all, on the new opportunity to be opened and only then analyze how such collaboration could be sustained, overcoming the usual obstacles.
So, a key insight is that collaboration might SOMETIMES work well, thus it should be carefully decided when it truly pays. There are two key negative branches of collaboration:
- There are several risks in collaboration, especially between organizations, which might disrupt the positive outcomes.
- Collaboration requires considerable amount of management attention.
An example where many efforts have been taken to establish effective collaboration is found in the area of big construction projects. A methodology called ‘A Project Alliance’, or Integrated Project Delivery has emerged to deal with the basic dilemma posed by the common contracts and basic structure for such big projects.
The problem is that the client has to come up with very detailed plan of the project, which is required to allow the competing contractors to come up with fixed-price for the whole project. The winning main/general contractor is then able to contract a number of sub-contractors. What usually happens next is that some errors, additional requests and missing parts are revealed and then re-negotiations take place, which please the contractors, but much less the client.
The concept of cost-plus came to settle this kind of re-negotiations, but when there is no fair visibility into the true cost, the above changes to the original plan are still great opportunities to squeeze more money from the client. From the client perspective it is difficult to assess the true cost of the project and it is even more difficult to ensure the quality and duration of the project. When we accumulate the efforts of the clients to plan in great detail and then feel helpless when errors are identified and more changes have to be introduced, the pain from running such a project is severe.
From the contractor perspective the initial bidding/competition phase forces him to reduce the price too much and by that take considerable risks, hoping to be lucky enough to gain a lot from changes in order to preserve satisfactory profitability.
A combined bad aspect of this kind of relationships is the mutual dissatisfaction from the outcome of the project. With all the changes and re-negotiations the project typically takes too long, the cost too high and the quality of the end product has been compromised. That basic dissatisfaction has a negative impact on the reputation of all the contractors.
It could be nice for the client to have more open and collaborative dialogue with the contractors, giving them more influence on the planning and ongoing execution. It is a more effective way to handle the complexity and uncertainty of such big projects. However, any solution has to be beneficial to every contractor. Without win-win no alternative way would be truly useful.
How the concern of cost, from the client view, and the concern for profitability, from the contractor view, can be dealt with in a way that would also be in line with the success of the project?
The idea behind the Project Alliance is based on two elements.
One is to create a collaborative team of the key contractors that manage the project with the understanding of drawing the most of the collaborative efforts to achieve great success. This structure is different than having just one key contractor who manages the whole project and contracts several, even many, subcontractors. Under the Project Alliance structure a consensus between the alliance members has to be achieved through active collaboration. One consequence is far better synchronization between all the different professional aspects.
The second element is establishing a gain/pain payment that is based on achieving few targets, defined by specific measurements, which together define the success of the project. The payment to each alliance member is made of three parts:
- Actual cost – the true cost paid by the members to suppliers and freelances, plus the salaries of the employees that are fully dedicated to the project.
- Fixed payment to the members for their work. In this kind of project the fixed price is less than the normal expected profit.
- Variable fee based on the agreed performance measurements for the project as a whole. The variable fee plus the fixed payment could end up with much higher profit for the contractor-member than the norm.
The variable fee and the fixed payment are not proportional to the cost! They are defined independently of the cost and it might include ‘total cost of the project’ as one of the measurements. This split eliminates the interest of the contractors to increase the costs that pass through their books in order to make a profit. It also eliminates the damage caused if their scope is reduced in value. The acronym given to this payment method is ‘CFV’, for Cost-Fixed-Variable. In TOC terms the throughput for every contractor is the Fixed plus the Variable.
The Project Alliance was used by several big projects that are considered especially successful, taking into account the lead-time from start to finish, the overall cost of the project and general satisfaction of the client. However, the vast majority of the big construction projects all over the world are still managed in the old way, despite all the predictable undesired effects. In order to understand the fears of adopting that direction of solution, let’s point to some potential negative branches:
- Maintaining trust between organizations is assumed to be shaky, especially without prior experience.
- The individuals within the client organization, who are in charge of the project, may feel robbed of their power to dictate whatever has to be done in the project.
- The contractors might find themselves in a dilemma when they see a short-term chance to squeeze more money, but feel bound by the collaboration agreement, where the variable fee is less than the opportunity they see.
- The uncertainty of the budget due to the variable payments might seem problematic. This might be more of a bureaucratic issue as big construction projects are exposed to much higher uncertainty.
- Many clients feel uncomfortable in selecting suppliers without having a fixed-price bid, and some formal procedures require such bids (though these are rare), mainly due to inertia and the fear of going against the current wisdom.
Another area where collaboration could add immense value is the relationships between a client organization and few of its suppliers. The regular relationships in B2B are: the client organization tells the supplier what is required, specs, quality, quantity, delivery time and price. Negotiations are about due-dates and price. The underlining assumption is that the client knows what and how much is required. In the majority of the cases that assumption is valid enough. In many cases the client is able to generate a bid/competition in order to get the cheapest price.
There are other cases where creating longer term engagement between the client and the supplier could boost the business of both, creating win-win. In most of those cases the basic information flow is still coming from the client telling the supplier what, how much and when to supply. The agreement covers longer time frame and exclusivity, thus ensuring availability of supply and security for the supplier.
There are fewer cases where true collaboration between client-supplier could truly enhance both organizations, creating new opportunities that cannot be achieved with the formal relationships of “we tell you what we need, you supply according to a general agreement on time and price, probably also minimum annual quantity.”
In those fewer cases the potential could be huge. When the collaboration opens the way to reach wider demand and/or achieving higher price then the potential of significant increase in throughput, which far exceeds any possible additional cost, exists for both organizations. Longer-term collaboration can also assist the buyer organization to simplify their purchasing processes and specification, allowing a reduction in overall purchase cost, leading each party to increased profit.
Both organizations have to invest management attention in providing true close collaboration, one may call it: partnership. Both need to earn a lot from it. One characteristic of any on-going collaboration is not just trust, difficult as it is to maintain between organizations, but also deeper understanding of the interests, values and general culture of the two organizations. Actually, this kind of understanding of the other side is a necessary element in establishing such partnership, because only when you understand the situation and its related effects on the other side – collaboration can truly be beneficial and far superior to the competitive common approach.
Goldratt already developed a vision connecting all the supply chain in partnership/collaboration, ensuring fast response to the taste and wishes of the market, following the insight that every link in the supply chain truly sells only when the end product is sold to the consumer. The idea was to split the throughput from every sale between all the participants, making them collaborate in order to ensure as high throughput as possible.
The vision of Goldratt raises several negative branches that need to be eliminated, like conflicting interests of a link in the chain when it partners with more than one supply chain. The collaboration along the supply chain should focus not only on the response time and lower inventory, but also actively develop new products and modifications to existing products that would capture more and more market.
All the above difficulties can be overcome with analysis and innovative thinking when the potential amount of the opportunity becomes clear. Collaboration is a means, especially for medium and small organizations, to gain extra competitive edge by becoming virtually larger with additional capabilities, capacity and more effective synchronization. Using the right thinking, and taking win-win seriously, the potential is unlimited – even though the ultimate constraint could still be management attention.