It goes without saying that a business needs a good relationship with all its counterparties, including its employees, customers, suppliers, contractors, advisors (legal, accounting, auditing, and so on), independent directors, and shareholders.

But this raises some questions, such as who needs to have such relationships with whom, what constitutes such a relationship, who is responsible for cultivating it (the provider or the recipient or both), how is it cultivated, what protocols should be adhered to, and how do you ensure compliance throughout your business? Since covering those topics would be well over the preferred length for such a blog, this piece just comments on ‘what is a good business relationship’.

Some would say it is where you get what you want as regards price, supply (volume and frequency) and quality. Others would disagree, saying the relationship needs to be mutually beneficial. The counter to that is, why does one need to settle for less favourable terms than one can get. It is after all one’s duty to act in the best interests of the shareholders of one’s business, and that requires one to strive for the best deal.

If you are the only supplier of a crucial product, do you increase the price of your product as much as you can, even though it puts the buyer under financial strain? If you are a monopolistic buyer, do you demand lower prices and longer credit terms from your suppliers, notwithstanding that it puts them under financial strain. If they continue supplying the quality and volumes you need, do you push them to the edge and take all the cream for yourself? Suppliers want to increase their prices, whereas buyers want lower prices.

Some would say, it is a free market- if you are not happy with the price you get, either stop producing the product or find another market. If for example you’re a beef producer not happy with the price you’re getting and understand your customer (the meat processor) is earning fat margins, what do you do? Do you stop producing beef, find another market, lobby the government for a fairer deal, or just accept your lot in life?   If the buyer can get what it needs in quality and supply at a lower price, why should they pay you a higher price? Again, if they can get longer credit terms from others, why should they accept your shorter credit terms? Nobody is compelling the beef producers in this example to continuing producing beef or compelling them to sell to the same processor. So, under this approach having a good business relationship is not about getting a fairer deal – that’s governed by market forces.

While that may be the case for maximising returns in the short term, is it also the best approach in the longer-term interests of the business? Many (probably most) of those with more power, exercise it to get a better deal for themselves. They bully weaker parties to accept their terms. That is shortsighted. History is littered with examples of city states and empires rising through conquering and subjugation, later imploding after the subjugated people joined forces with a rising power or new entrant to conquer and sack the empire that had subjugated them. The empires who experienced the greatest longevity tended to be those who had good relationships with neighbours and other allies and treated their people well. When faced with a major threat, empires need loyal support from their people, neighbours and trading partners. If they subjugated those people and otherwise treated them poorly, they will not only not get the support they need when they desperately need it, but they’ll also find those subjugated people joining its enemy.

This also applies in the business world. At the time when the dominant party is most vulnerable, when it most needs the support of others – its employees, customers and suppliers – it will find itself not only facing that threat alone if it has treated others poorly but also finding that they have joined the enemy. When parties feel they are getting screwed over, they will look for alternatives.  For lack of alternatives, they may accept their predicament. But believe you me, when a suitable alternative arises, they’ll relish the opportunity to get their revenge. Nobody forgets being screwed over.

It would be foolish of a big and powerful business to think that its dominant position will continue forever. Major disruptive forces could be brewing without it even knowing.  And when such a party arrives, it should expect those it has screwed over to join the other party and relish putting the metaphorical knife into it. That scenario can be avoided by ensuring that it does not abuse its power.

In the Australian market, as Bunnings grew its geographical footprint most suburban hardware stores closed. It became the dominant hardware retailer by a country mile and faced next to no competition. Then a new entrant arrived, the Masters hardware retailer backed by Woolworths (one of Australia’s two largest retailers) and Lowe’s (a large homewares retailer in the USA). Within only a few years Masters folded and closed. It was unable to convince Bunnings’ customers to jump ship. Had Bunnings exploited their dominant market position, their customers would have left in droves and switched to Masters. Bunnings’ management were sensible enough to recognise the importance of not abusing Bunnings’ dominant market position, so did not face a mass exodus. Its customers (retail and tradesmen) remained loyal to it.

It is not only large businesses with a large chunk of market share that can exploit a counterparty. Take, for example, a smaller business that has developed a better product or better business model, that enables it to generate a handsome return on investment for its owner/s:  If it takes that opportunity to generate handsome returns, it is essentially inviting others to enter its market and compete against it. So, if you can charge a much higher price than you need to, be careful – as doing so could be detrimental in the longer term. Others may see your market as being attractive, as generating above market returns, and so would be inclined to enter your market which a competing product or service. To gain market share they are likely to spend a lot more on marketing and advertising and are likely to offer their product / service at a lower price. In order not to lose customers you will then need to do the same – which is likely to severely erode your profit margins and returns on investment. Your customers won’t forget the much higher prices you were charging before competition arrived, so will be more inclined to go with the competition. Nobody forgets being screwed over!

There is a lot more merit in setting your price at a level where you’re able to make a respectable profit, and prospective competitors conclude there is not enough in it to justify the investment needed to enter the market – to offer a competing product or service and pay for the marketing and advertising needed to get sufficient market share. If your corporate customers get the impression that you are price gauging, they are quite likely to approach and persuade others to enter the market to compete against you. If for example, you’ve been outsourcing a labour-intensive service and discover that due to technological or other changes much of that work can be automated, resulting in the cost of providing that service dropping significantly, if your provider does not reduce its price (preferring to keep the extra profits for themselves), you’re likely to conclude that they’re screwing you. In that case, you’ll be determined to find a better deal and terminate your relationship with that party.

So, if you want a long-term relationship, don’t try to get one over the other party.

Having a good business relationship is about a lot more than price and terms of trade. It is includes meeting needs, avoiding problems and where issues arise, resolving them. If there is a problem, or looming problem, it needs to be identified early, solved and in many cases solved quickly.  Take a commercial printing business for example. If they are in the middle of a print job or have a full schedule of jobs lined up for the day, they know they have deadlines to meet, and know those deadlines are crucial for their customers. A magazine, for example, needs to hit the stands on a certain day. So, if there is a problem with the paper or the machine, that needs to be fixed ASAP. The people at the printing business want to talk to someone with a thorough understanding of the product, and if it’s faulty they need it fixed, or a replacement provided, ASAP.  They don’t want to talk to an ‘order taker’ and certainly don’t want to leave a message on an answering machine or talk to an AI answering service.

It is important to decide on the nature of the business relationships you want to have with employees, customers, suppliers and other counterparties and then ensure that your business (your management and employees) reflects that attitude in its day-to-day dealings. This is easier said than done. It needs to be reflected in the values set for your business, incorporated in decisioning processes, reinforced from time to time and importantly it needs to be reflected in your behaviour and that of your management team. Your people will follow your lead, and your customers and suppliers will notice your attitude through the attitude of your employees.

It is also important for you to be alerted to comments made by the employees of your customers and suppliers, because those comments probably reflect the attitude of their superiors. It is not only what is said, but also how it is said, what tone is used.  Only once you discover it is problematic, can you deal with it. So, you will need to design and implement a process through which such comments are picked up and relayed up the line.  If you don’t, it is a lot more likely that you will be unaware of what your customers and suppliers really think of your business and then be surprised when they switch to another provider.

R&M can assist business owners with this exercise. It can help business owners determine how they want their people to deal with their businesses’ various counterparties, devise strategies to implement it throughout the business, and strategies to encourage staff to be alert for comments made by the staff of counterparties.

Here is a link to R&M’s Advisory webpage, which provides more information on what it offers, why and how it goes about its business – https://www.rogersmorris.com.au/rm-advisory/ . An email address is provided for those who would like to explore what R&M can do for them.