Are we really partners?
By Bernard Sia July 1, 2013
- IT vendors and customers alike go on about partnerships
- You are not a partner unless you have skin in the game
I REMEMBER listening to Power Station (not to be confused with The Power Station -- ED), a Taiwanese rock band that seems to be stuck in 1980s pop-rock ala Journey and Foreigner; and the singer opened up to a song with a quip that this was one of their early hits, and when they were doing pub gigs everyone would ask for this tune till they felt like puking.
Well, Partnership is a song sung by IT vendors, and frequently demanded by customers alike. But seriously, I often wonder whether Malaysian IT firms and their customers are able to truly exhibit partnership traits via their business transactions.
Intertwining destinies anyone?
I can’t emphasise this enough: You are not a partner unless you have skin in the game.
This cuts both ways, not just from the standpoint of the vendor. The aphorism is manifested by having both the customer and IT vendor underwrite risks while they traverse the treacherous and bountiful waters of business together.
This means a willingness to accept business losses together, as well as the business being willing to share profits with IT – a true profit and loss contract. Among others, the vendor has to:
- Assume risks from losses incurred through litigation, or direct losses from failed IT systems.
- Invest first in the IT solutions proposed and delay returns until objectives are met.
Intertwining fates fail when both sides are reluctant to both suffer and share consequences. Everyone wants the rewards, nobody wants the downside, and the customer wants the vendor to bear all the risks.
For example, when an IT system fails and leads to loss of potential revenue worth RM50,000: It would not be fair for the IT provider to assume all of the losses unless it is proven that these are immediate direct and unrecoverable losses.
Similarly, from a performance gains standpoint, when the IT system manages to heighten queuing performance by 50%, thus increasing revenue by RM100,000 a month, it would not be fair for the IT provider to also claim the entire amount as there are other factors at play.
This line of penalties and rewards thinking is time-consuming, not to mention chaffing to the relationship experience as we end up arguing about how to cut the pie, versus growing it.
I have a solution, but before we get there, here’s another partnership pitfall.
Consumption and availability-based metrics
It is this: Consumption and availability-based metrics are not a partnership model.
Both the vendors and the customers tend to imbed pay-per-use models or consumption-based metrics into partnership contracts. Unfortunately, as a banker once told me bluntly, “Why would a business like a bank even want to do that – our transactions ALWAYS grow; you IT vendors will ALWAYS make money regardless.”
Secondly, there can also be operational deficiencies that lead to high consumption. For example, a badly written software code, a botched batch job that continues to churn and consume expensive mainframe MIPS (million instructions per second). Any CIO (chief information officer) who has a mainframe knows what I am talking about.
More importantly, the business is not all angelic either; going to the cloud while the staff members maintain torrented movie haunts in the cloud puts a huge smile on Jeff Bezos’ face.
Availability-based contracts are also extremely penalty-obsessed. Thus, we are again counting and splitting hairs, an experience not vested towards partnership success but blame-shifting.
Solving this conundrum begins with identifying the performance levers
The IT vendor has to know exactly how the IT system affects business performance, ultimately picking the areas that it can manage best. Not all IT investments have direct impact; some are even tertiary, and as such, not suitable for ‘partnership’ models.
I mean, let’s call a spade a spade: An IT business sale does not make the transacting parties partners. Perhaps the figure below explains how difficult it is to identify causality between IT and business success.
The easiest IT investments to model for positive business effects are solutions supporting transactional systems that carry immediate monetary values – e.g. payment systems for banks and telecommunication links for mobile carriers.
The solution – put your money where your mouth is
Although the previous engagement model seems complex and risks prolonged debates, it can be simplified. Here’s how (cue imaginary conversation):
Vendor: How so?
Me: Put up mullah for equity stake in the customer’s company.
Vendor: Wah liao eh, Siao ah!? (“Are you nuts” in the Hokkien dialect)
Me: No, I am not. Now do what everyone does when they invest on equity. Negotiate a return for the stake. Let’s assume that the company agrees on a dividend amount.
Vendor: … (Silence, pondering…)
Me: Now… (Paused for suspense) substitute the investment equity sum with the value of the IT systems and solutions that you carry.
Vendor: … (More silence, but eyelids fluttering)
Me: Lets extend the equity stake analogy further; instead of casual advisory involvement as a board of director, you are now an executive director who operates the IT solution and ensures its success for the business.
Vendor: wah… like a real business partner…
- Imaginary conversation ends –
This imaginary conversation exists as I do not have the mullah to begin a real one with an actual business owner. But I would love some feedback. You could have this conversation with a customer and it’ll be pretty straightforward too, along the lines of:
“Bro… can I give you RM2 million worth of IT solutions and run it for you …?”
There are further examples that exhibit partnerships; for example, the vendor can invest in co-developing intellectual property, which could then be marketed and profit-shared. The business provides the domain knowledge while the IT firm provides the software manpower to develop the intellectual property.
Like all partnerships, expectations must be exceedingly clear, contracted in even.
In closing, the intent of this article is to challenge the market to truly manifest partnership engagements.
Otherwise please refrain from abusing the term ‘partnerships,’ because I hear that nausea within the IT industry may be pandemic.
Bernard Sia is head of strategy at Mesiniaga Alliances Sdn Bhd. His opinions here do not necessarily reflect the views of Mesiniaga.
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