Transition costs impact customer and contract assembler.

Why should EMS providers and their customers value win-win relationships? The short answer is transition costs. The longer answer is that in complex, long-term relationships both parties eventually win and lose. Contractor-driven schedule inflexibility or engineering change order (ECO) price hikes down the road can easily wipe out any customer-driven price concessions achieved today. An ongoing adversarial relationship will eventually lead to the search for a new contractor, either because the OEM starts to look elsewhere or because the EMS provider suggests the OEM look elsewhere.

Like divorce, in breakup situations no one really wins. Transition costs impact both companies, and each will bear additional costs in new relationships with other companies.

So, how can companies get to win-win, while still maintaining a strong negotiating position that achieves corporate goals? The answer is fourfold:

• Select partners carefully.
• Set expectations through a robust manufacturing agreement.
• Address issues rapidly.
• Be open to changing business models.

Select partners carefully. Building a win-win relationship starts in the prospecting phase. No EMS provider can be all things to all companies. The sales cycle is 12 to 18 months long. When EMS providers have a good profile of best-fit customers, and the sales team is focused on chasing those accounts, the probability of establishing a win-win relationship is much higher than when the team chases any available lead. Similarly, it is important for OEMs to have a clear vision of their outsourcing goals and focus on evaluating EMS providers with the right mix of services, culture and manufacturing locations.

What elements of “fit” should be analyzed? Key areas include:

• Anticipated revenue/production volumes (both in terms of too low and too high).
• Product mix and component commonality issues.
• Margin potential (different industries often have different levels of margin sensitivity).
• Geographic build site preferences.
• Third-party quality certification preferences.
• Likely service needs.
• Financial stability.
• Potential liability risks.

The goal is to cultivate a pool of prospects that value the EMS provider’s core competencies and facility locations, and whose pricing expectations are in line with the supplier’s margin goals. Pricing sensitivity tends to decrease when an OEM selection team feels a given contractor offers a package of services aligned with their requirements and addresses issues in superior fashion to competing suppliers. In short, a focus on fit is often the first key to maintaining acceptable levels of profitability.

Set expectations through a robust manufacturing agreement. Many managers view contracts as a time-consuming exercise with minimal value. The reality is that a good manufacturing agreement helps define the relationship’s parameters and is often the first step in building a strong win-win framework. When companies view the elements of the manufacturing agreement in terms of the business relationship they govern, negotiations create a good checklist for project governance. Both parties end up discussing the areas likely to create the most issues over the life of the project. And when those discussions occur prior to production, each team has the ground rules for maintaining the business relationship, which can make both project launch and program management much easier.

The key to fast contract negotiations is structuring a win-win manufacturing agreement with reciprocal terms on major clauses. Neither company should be expected to carry 100% of the risk. Starting with a one-sided boilerplate agreement sets an adversarial tone. When unacceptable clauses are proposed, offer a clause that represents a compromise rather than rejecting the initial clause outright. Be prepared to discuss the business reason behind the change. Make sure the parties who will be involved in managing the relationship are also engaged in the contract negotiation process, as processes driven solely by corporate legal teams or contract departments operating in a vacuum may focus more on negotiation wins than actually structuring reasonable compromises.

Address issues rapidly. In EMS, it is less of a question of if a service failure will occur than when it will occur and how it will be resolved. It is better to tell a customer upfront that a request can’t be satisfied than to exert effort and return with a good excuse when the challenge isn’t met.

Win-win relationships are built more on trust than on flawless execution. A program manager who analyzes each request and offers a range of achievable options will drive greater levels of customer satisfaction than one who delivers inconsistently on customer requests. Offering options also permits the customer to buy into the resolution by choosing the option most aligned with their goals.

Be open to changing business models. The ultimate benefit of a win-win relationship is existing business growth. But often that growth isn’t simply the addition of similar business. Instead, the trust built between teams opens the door to conversations about long-term customer needs. EMS management teams that recognize the value of those conversations are typically prepared to make requested investments in exchange for additional business.

Companies experienced in cultivating win-win relationships create opportunities for these conversations to occur through well-structured quarterly review meetings and senior management visits. Additionally, program team members are vigilant for signals given by their opposites at the OEM on new project or multi-division opportunities.

Susan Mucha is president of Powell-Mucha Consulting Inc. (smucha@powell-muchaconsulting.com). Her new book, Find It, Book It, Grow It. A Robust Process for Electronics Manufacturing Services Account Acquisition, is scheduled for release in March.

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