‘Return on Relationships’ – the ROI of building supplier relationships and how to measure it

The annual State of Flux global supplier relationship (SRM) management study made its appearance in London last week at the 2024 Supplier Management Summit in its 16th rendition, this time themed ‘Return on Relationships (RoR).

The report once again delivers data-backed findings of the state of SRM across the globe and gives best practice models, guidance and suggestions stemming from those findings. These findings are interwoven with real-life case studies to help organizations fulfil the job of building the ‘R’ in SRM and deriving value from it.

State of Flux’s best practice model consists of six pillars that have been the staple of its proposition from the outset: value, engagement, governance, people, technology and collaboration.

• Value — The financial and non-financial value that a supplier offers to help the organization reach its strategic goals.
• Engagement — Between the business managers who are working with suppliers on a daily basis, including the C-suite, and the suppliers themselves.
• Governance — Determining which suppliers bring the most value to the business and which to prioritize.
• People — The development of SRM skills for procurement and supply chain professionals, without which SRM can’t happen.
• Technology — The enabler of SRM initiatives by improving communication and collaboration among all parties.
• Collaboration — The approach to supplier management that allows businesses to bring more minds together to solve problems and innovate, making the business a more attractive customer for the supplier.

To quote our analyst from 2022 — “State of Flux developed its approach based on the realization that many organizations practicing SRM do only Supplier Management. Supplier Management (vs SRM) is more of a one-way street where suppliers are considered simple necessities. By forgetting that the R in SRM stands for relationship, Supplier Management organizations are often missing value generated from partnerships with strategic suppliers beyond the traditional remit of procurement savings.”

The risk events of 2020 and their impact on business/supply continuity showed how organizations with strong relationships with their strategic suppliers can perform better than those without. They were often given access to resources (manpower, inventory, raw materials, etc.) when others were not. Those organizations also supported the suppliers that needed it. So the interdependence of modern businesses is clear — an organization’s performance and survival is strongly tied to that of a broader ecosystem. And this ‘collaboration’ is a central theme throughout the report (and ranked highly by respondents – see later).

The report surveyed 496 respondents from 334 companies located around the world representing 13 industry sectors. Organizations are divided into categories: ’Leaders’ that are at the cutting edge of SRM, ‘Fast Followers’ that are maturing quickly and ‘Followers’ that either have limited ambition or are at the start of their SRM journey.

Some high-level, key findings

The report authors are concerned by the drop in the number of SRM Leaders this year, even though the research shows that “year after year the benefits of SRM are proven and compelling.” Some of the findings demonstrate a lack of investment in what they call “this crucial field,” as “not having a well-structured program in place leaves value, in all its forms, on the table,” which, they say is “an oversight organizations can ill afford.”

However, some of the high-level results are encouraging:

• Close to half (46%) of participants revealed their company’s supplier management program is delivering financial benefits of above 4% per annum.
• Just over 90% of Leaders indicated that they capture or monitor the financial benefits that are delivered above and beyond contracted spend for their critical and strategic suppliers.

Unsurprisingly, hampered by lack of access to accurate or meaningful data, the challenge for many respondents is capturing and quantifying the return on their supplier relationships and reporting on them. So technology remains a barrier for many:

• 19% said their company had no system in place to support contract lifecycle management (however, of Leaders, 82% do have a dedicated system).
• 21% reported the systems they have to support performance management were ‘poor.’
• 23% said they had not yet developed a business case at all for supplier management.

However, for all respondents, one of the standout results this year shows ‘Technology’ as the strongest pillar and enabler of good practice SRM with an average score of 59% — a 10% increase from 2023. Close behind is ‘Collaboration,’ scoring 52%. However, ‘Value’ remains the least developed pillar, with an average score of 36%.

According to Alan Day, CEO of State of Flux: “This year’s research illustrates that there is still a significant opportunity across maturity levels to better utilise technology to support and underpin supplier management activities. We see adoption of dedicated solutions within certain areas, but there is still a strong reliance, even with Leaders, on desktop solutions such as Excel/SharePoint/ Teams.”

Of course, technology is just one aspect of this wide-ranging analysis. The report gives granular analysis of the other pillars in dedicated sections.

As we hinted in the title, the report aims to offer Procurement the information it needs to measure the holistic impact of supplier relationships on the organization’s bottom line and equip it with the knowledge it needs to build a business case to achieve that through SRM.

In fact, it contains a very useful section on building the business case for SRM and offers a step-by-step guide to calculating the multifaceted metric that is ‘Return on Relationships,’ going beyond the immediate benefits of cost savings and efficiency — well worth a read.

But the great thing about the State of Flux annual SRM report is that it does not present a static picture. The research findings are combined with the insights from previous years’ reports, which allows the authors to look at trends and practices within SRM on a wider scale, spanning millions of data points, and deliver good, practical advice.

Download the report for free here.