Spend Matters would like to welcome Lynn James Everard for today's guest post.
In a down economy, sales organizations are under enormous pressure to negotiate new deals with potential customers. And some will see advantage in creating reciprocal agreements. The concept is simple from a sales perspective. If we buy from them, they will buy from us, and that will strengthen our revenues. Of course, sales management will also see the prospect of sales commissions. But salespeople are more likely to overestimate the potential revenue as well as the potential profit. If the net profit on an extra million dollars in sales will be fifteen percent, or $150k, but it will require foregoing a savings opportunity of $200k on the same volume of purchases that would have been offered in the reciprocity deal -- it is simply a bad deal. Although it may be difficult, procurement management must attempt to quantify the lost savings opportunity while convincing the sales organization to present a realistic assessment of the net profit the deal will bring.
Reciprocal relationships can severely damage the market leverage that a purchasing department has spent years building. And no matter the certainty of the sales organization's belief in the amount of new revenue and profit that the reciprocal relationship will bring, they may not be able to ensure either. Yet purchasing will spend years trying to recover its buying leverage and perhaps even its credibility. Reciprocal relationships may be acceptable in some situations but the purchasing department must not only be consulted but also brought into the negotiations as a key stakeholder.
Does your company have a reciprocity policy? If not, perhaps now is the time to consider one.
Lynn James Everard