Transparency and types of partnerships


12 December 2004

Based on Ronald Coase’s theory of firms, Lars Plougmann argues that transparency is the next big thing, and offers specific advice for professional services. The core of his argument is that because trasactional costs for companies are ever decreasing, the business relationships that really add value are the ones where you are sharing business processes.

Lars observes that the most popular suppliers are those who know our business processes well and who are letting us look into their business processes and concludes that transparency should be one of the factors suppliers are selected by.

But surely there are suppliers and there are suppliers. There are some with whom you want a deep partnership and others where, frankly, an arm’s lenght relationship seems more appropriate? That is the intuitive feeling, and the conclusion of an article titled We’re in this together in the December 2004 issue of the Harvard Business Review.

Based on work with Wendy’s and other organizations, the authors at Ohio State University have developed a model for partnerships which includes information on things like shared objectives and resk-reward structures to predict the types of communications and levels of business processes integration that are optimal. Crucially, they have also established a workshop based approach that will allow senior managers from two firms to discover their partnership type in a day and a half.

In their model, they consider the ease of coordination and the degree to which the companies desire a partnership (the “driver points”) to determine the appropriate type of partnership.

It is important not to assume that a type III partnership is somehow better than a type I. The point is to ensure that you have the right relationship for the business at hand. This will be much more productive for both parties and make it much more likely that the partnership is a success.

The authors offer advice on a selection of management components for each type of partnership, including planning, joint operating controls, communications, and risk-reward sharing. There is nothing specifically on the sharing of business processes that Lars discusses in their edited list, but the general principle that the higher types of partnerships require higher levels of transparency and shared processes apply.