Open Innovation in Large Contracting Relationships

by Kevin McFarthing

Open Innovation in Large Contracting RelationshipsThe International Association for Contract and Commercial Management (IACCM) is a successful organization of professionals involved with large contracts, procurement and outsourcing. If you want to know about anything to do with this area, they are the “go to” people, and are very ably led by Tim Cummins. I was delighted when Tim asked me to present at their EMEA conference in Amsterdam in May on the subject of Open Innovation, Contracts and Relationships. I’ll cover some of the learnings in this and following blog posts.

Innovation from suppliers is a rich seam to explore. A recent study by HEC in Paris showed that 88% of companies tap into their suppliers for innovation. However it’s rarely the primary driver in the contracts and relationships that IACCM members develop. It is often part of the contract, but it seems that the relationship is rapidly becoming the most important part (where have we heard that before in Open Innovation?).

Most contracts are about retention of power, minimizing risk and maximizing opportunity. If your position is defensive, driven by legal considerations and less about the business, you are likely to approach innovation in the same fashion.

So, I heard anecdotes about clauses where innovation is “demanded”, for example the supplier needs to deliver twelve innovations per year to the customer; where that innovation is not specified up front and the customer decides unilaterally whether to accept it or not; and where an innovation offering from a supplier is then sent out to tender to secure the lowest cost provider.

Don’t get me wrong; there is a lot of good practice as well. There’s also a fine line. Procurement people are primarily measured on delivery of commercial targets like cost saving, delivery targets and payment terms. They aren’t often incentivized on innovation. So it’s difficult to criticize them if they focus on what their organization asks them to deliver.

Tim and IACCM are strongly promoting a focus on relationships as the key to success, rather than focusing purely on what’s written into the contract. Here’s where it folds quite nicely with Open Innovation, as the quality of the relationship and the foundations on which it is built are probably the most important success factor.

So a lot of the common sense that works well in Open Innovation also applies to large contracting relationships. Here’s a quick summary, I’ll expand on this in a later blog, as well as looking at it from the perspective of the supplier:

  • Follow the Want/Find/Get/Manage sequence
  • Understand what you want before you engage the supplier
  • Share your strategy, customer needs, technology gaps etc before describing specific challenges
  • Spend more time defining the problem/opportunity than detailing the solution
  • Understand the impact of specific contractual clauses on innovation potential, and don’t let them get in the way
  • Directly involve key internal functions in the development and management of the relationship
  • Don’t forget the value of personal relationships

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Kevin McFarthingKevin McFarthing runs the Innovation Fixer consultancy, helping companies to improve the output and efficiency of their innovation, and to implement Open Innovation. He
spent 17 years with Reckitt Benckiser in innovation leadership positions, and also has experience in life sciences.

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