When you think about a vendor, do you think, "Wow, they really know how to throw a party!" If so, let me introduce you to rule number 1 in vendor relations--There is no free lunch! Somehow, some way that freebie, whether it be lunch, golf, sports tickets, travel or whatever, is costing your company. You may not see the added cost, but it is there. Vendor relationships often get in the way of cost minimization. And, I am not just talking about free perqs, but also friendships. Fortunately, there are ways to control and eliminate these hidden costs.

Two Levels of Relationships
There are two levels of vendor relationships that impact pricing and service levels-people to people (P2P) and company to company (C2C). C2C relationships are independent of who the vendor's account rep is. They should also be independent of who the recommender and decision-maker are within your organization. In other words, if the people involved in the purchase and sale should change, the vendor to client relationship would not change. P2P relationships, on the other hand, are directly dependent on who the specific people involved are. If the people change, the vendor to client relationship would suffer.

C2C relationships can be healthy and can result in aggressive pricing on goods and services purchased as well as higher service levels. I am a strong advocate of maintaining good C2C vendor relationships because it fosters partnership and builds customer loyalty in your vendors. Good C2C relationships can, from time to time, give you the extra engineering/design support or that expedited delivery you need. However, if you are enjoying a lot of free help from a vendor, you are definitely paying too much. Remember rule #1--there is no free lunch!

Let me share a personal P2P experience that resulted in hidden costs. My boss was an avid golfer. Every weekend vendors and wannabe vendors would treat him to golf. I swear he hadn't paid a green fee or bought lunch in 10 years. Every Monday new projects were assigned that grew out of discussions during the boss's golf matches over the weekend. Do you think these purchases were shopped around? Of course not! Did we overpay? Absolutely! My boss's "free" golf was paid for by our employer through inflated pricing.

Employees should maintain a comfortable distance from vendor reps. Over time friendships frequently develop between employees and vendor representatives over time, both during and after hours. This is only natural; unfortunately, friends don't squeeze friends for better pricing. An employee feels disloyal to their "friend" if they shop around a good or service currently purchased from their pal. In a recent cost reduction engagement, a freight broker, with whom I was re-negotiating price, played the relationship card rather than renegotiate. The President of the vendor was friends with the client's divisional VP who squelched the whole RFP process. The result--a $100,000 per year potential savings dwindled to only $8,000. That is an expensive relationship!

In another case, I noticed that a prospect was paying too much for property and casualty insurance. When I pointed this out to the CFO he laughed and said that the agent was the principle's best friend and had been their agent for 10 years. Case closed! P2P relationships cost your business money.

Why do some companies only hire attractive sales reps of the opposite sex? Why do some vendors have lavish entertainment budgets? Because they are selling based on P2P relationships not merit. I am not saying you should only deal with unattractive vendor reps or ask to see the vendor's entertainment budget. But, if a vendor hires only attractive reps of the opposite sex or demonstrates a healthy entertainment budget, be very wary of that vendor.

Holding the Line
How can you prevent P2P relationships from costing your business? One good example would be Price Club (since acquired by Costco.) Price Club had a very strong culture of cost containment. Their strict policy did not permit team members (employees) to accept gifts from vendors, including simply paying for lunch. This clearly kept vendor relationships at arm's length. When purchasing decisions were made, they were based on merit, not P2P relationships. If employees believe the company is cost containment focused, they will be cost containment focused. If they understand that management frowns on P2P vendor relationships, they will be less likely to foster P2P relationships with vendor reps.

How do you foster good C2C relationships without P2P relationships getting in the way? The answer is the 3 P's--principles (corporate values), policies and practices.
An earlier article addressed fostering a cost containment corporate culture and developing company policies to foster that culture. I won't repeat the details of the article here, but a company should design their desired corporate culture, communicate it effectively and adhere to it from the top down. Employees who see the bosses develop P2P friendships and benefit from free perqs are likely going to develop friendships and look for perqs themselves. It's basic human nature.

Another good example of fostering good C2C relationships is Albertson's, a large grocery chain. The corporate culture at Albertson's is to "partner" with their vendors. They work closely with vendors to optimize the goods and services they purchase. Thus Albertson's fosters loyalty in both directions. However, when push comes to shove, it is very clear that you are a vendor and that other potential vendors are waiting in line to displace you should you overprice or under-deliver. Even though my company processed their credit card payments, Albertson's kept a close tab on what our competitors were offering price-wise. In the end, when Albertson's added check verification, they did select us but only after shopping it around to insure we were aggressive on price. 

Summary
It is difficult to balance good C2C relationships without developing counterproductive P2P relationships. But if you accomplish it, the result is a Win-Win relationship. Start by applying the 3 P's-principals, policies and practice. Foster C2C business relationships but frown on C2C relationships. Bid everything! Scrutinize any single-source bid or contract. Stay in touch with your vendors' competitors and check competitive pricing from time-to-time. Keep pressure on your vendors to avoid price increases and to get price reductions. Change out your people who are in key purchase decision-making rolls from time to time to break up P2P relations. Keep your vendors just a little off balance.

Then, keep your eyes and ears open. Look for signs of inappropriate P2P relationships. Severely limit or entirely prohibit freebies. Don't take any freebies yourself and let it be know that you don't. Those Super Bowl tickets can be tempting, but remember there is no free lunch! If you find inappropriate behavior, call out both the employee(s) and the vendor.

Just remember that a Win-Win and free lunch do not coexist. Always go for the Win-Win.