Choking innovation

I don’t have more experience than my incoming Masters degree or my personal living among entrepreneurs and managers to say what I’m saying in this post. Nevertheless I still think it needs to be said. First because it reflects the paradox shift we are going through in management. Second because firms need to wake up and start changing their relationship with their clients and suppliers.

I first heard of it in 2009 in a meeting with some local suppliers here in Vitória, Espírito Santo state, Brazil. These are mostly medium-sized entrepreneurs that discuss their difficulties in supplying for large manufacturing companies that are located here. In that meeting, they turned the discussion to a request for providing “innovative ideas” to their contractors.

At first, it sounded to me like a great step, one that could bring lots of opportunities for them – to sell more services with embedded knowledge and higher value – and for the contractors to enhance their performance. However, I was taken by surprise when they all started to laugh. The request was somewhat considered ridiculous, even offensive to some businessmen present at that meeting. My first reaction was “why are they so defensive to change? There are lots of opportunities for them here!” but then I started remembering previous meetings of this sort. And it was indeed an insane request.

All large contractors in Espírito Santo are commodities producers and therefore their profit margin (or what they can do about it) is mostly about cost. Therefore their strategy for a long time was to pressure their suppliers to “do more for less”. It was common for the contractors to engage in joint meetings to search for unnecessary people and materials hired for the job to avoid waste of material, money and time in order to lower the price of the provided service. Even online auction to get new contracts were established: whoever do it for less gets the contract. Companies were getting clearly choked by a very visible hand.

And then, with no changes, with their margins near to zero, all of sudden the contractor asks: “hey! We need new ideas and innovation! And we need you to do it with us!”. Of course suppliers should laugh. Innovation is costly and uncertain, requires trials and errors, and it is time-consuming. The reward is high, of course, but also is the investment. And without balancing the relationship – which is clearly centered in achieving lower costs – suppliers will laugh at such requests.

What is needed is to hear what’s behind the laugh and find common ground where the collaboration can be fruitful for both sides. Contractors need to stop listening only to what they want to, and start paying attention to their partners’ voices. After all, in many industries, the suppliers are also the most important resource for innovative ideas. Loosen up the grip is very important to reestablish trust and initiative.

Even so, suppliers also need to take the leap and understand that, without innovative initiatives, they might also be trapped into an ever tighter pressure to “do more for less”. One that can only be broken with creative solutions to break from the competition that can be reduced to an online auction…

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