Is Fairness A Good Basis For Commercial Relationships?

We often hear comments along the lines of this – “we are happy for our suppliers to make a fair return”.  That comes from procurement people, but also politicians talking about government buying. But the sixty-four million dollar question is this. What exactly is “fair”?

Because there is little point agreeing that we want the suppliers to make a “fair” return if we can’t agree what that is. How exactly do we define a fair return?

We might say that is comes down to return on capital - firms need to make an acceptable return on the money invested in the business, otherwise the owners of the capital will do something else with it. But in a low interest environment, where alternative investments pay low returns, the return on capital of 10-15%, which most blue-chip firms make, might look on the high side. Is it fair to the buyers?

Or is fairness defined by profit margin? But then what is a fair margin? Some industries run quite happily on average bottom-line margins of 5%, trading businesses on 1% or less. In others, the expectation is for something much higher.

Often, this gets tied in with the rewards for people in the supplier’s business. If the top executives are making millions, that doesn’t seem “fair” perhaps. But the subjectivity of the concept of 'fairness' is also clear from this discussion. Some readers will think a million or two, or even more, is fine for the CEO of a large business; others may feel it is disgraceful. Similarly, one category manager may feel a 10% margin for a good supplier is very fair - her successor may feel it is excessive and unreasonable.

Another weakness in the concept of fairness is that is fundamentally suggests a 'planned economy' approach to business. Maybe not the full Stalinist 5-year tractor production plan, but the idea that someone can sit outside a business and reasonably determine how much profit an organisation is allowed to make. We all know the past history of that sort of process, and it isn't exactly positive.

Of course, market intervention of this type does happen in certain industries now that are heavily regulated, but interestingly these are probably not examples anyone would quote as best practice in terms of service, innovation or dynamism.

So, we all have a sense of what we mean in broad conceptual terms when we wish for a fair return for our suppliers. But pointing out these difficulties shows that the assumption we can somehow objectively and scientifically define fairness, let alone translate it into a basis for doing business with suppliers, is wishful thinking.

If you are in a powerful position in a market, or with particular suppliers, you may be able to impose a certain margin or return. That might even be the best route in certain very specific cases. But don't be fooled into thinking that the supplier or indeed an external observer will necessarily agree with your definition of fairness, or that the tactic will be appropriate in many cases.

Fairness is of course a useful concept to keep in mind when looking at strategic supplier relationships and to understand motivations at individual and business level. But it is little use when it comes to actually determining how much should be paid for particular goods or services. It is no substitute for much more powerful determinants in the world of economics and procurement - markets,  competition, value and negotiation.

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