B2B buyers have multi-fold corporate responsibilities.
First and foremost, they must obtain value-for-money in purchasing solutions that solve problems their organization faces. This means buying the right solution, from the right supplier, at the right price. This is part of a broader mandate. Private companies exist to generate profitable cash flow for their owners. Government agencies and non-profits must husband their resources in order to deliver the greatest social value with what they have been given.
These B2B buyers also have a duty to the community they serve and in which they operate. They must be conscious of the impact they have on the world and endeavor to make it as positive as possible. The best businesses are conscious of their full set of stakeholders including vendors, employees, customers, and neighbors, at a minimum. This is good corporate citizenship.
When we speak about buying the right solution, from the right supplier, at the right price, it means that we have found the good or service that has the best fit for our problem and we don’t pay more than a fair and reasonable price. But it also means that we want to ensure that, where possible, we are sensitive to who the supplier is. Ideally, our business will help the supplier develop their capacities and their capabilities and to obtain financing, even as we as buyers get what we need.
When we think about social procurement, we talk about what we would need to do to increase our purchasing from businesses owned, operated, and controlled by members of historically disadvantaged groups. Often, buyers interpret this to mean purchasing from them directly, i.e., the diverse businesses are our counterparties.
The majority of diverse suppliers are small and medium-sized businesses. In a country like Canada, 99.7% of businesses were small and medium-sized. They account for roughly half of GDP. If you make it easier for small and medium-sized businesses to sell to you, even indirectly, then the diversity will follow, naturally. So, we should think of the problem as one of engaging small and medium-sized vendors.
These firms may be too small for us to purchase from them directly. We’re more likely to buy from someone who then subcontracts a portion of the business to one of these diverse suppliers, if at all. We would struggle to know how much of our third-party spending trickled down to these suppliers in most (if not all) cases. This makes the prime contractor’s role that much more significant. This gives the large businesses much more sway over the small and medium-sized businesses than is desirable, potentially.
Much has been written about behavioral economics over the past thirty years, looking into the psychological underpinnings of how human beings make decisions. Core to this research is the elucidation of a host of biases that lead us to make sub-optimal choices. For example, confirmation bias means that we look post facto for evidence that a decision is correct. Or there is loss aversion in which the disutility of losses is greater than the utility of commensurate gains. Or the mere exposure effect that makes us prefer things that we know well to new things. There is in-group bias that leads us to favor people in our in-group over those in our out-group. The list goes on.
Large prime contractors may prefer to stick with vendors they know. The mere exposure effect means that incumbents have an advantage, further distorted by the natural tendency to prefer people who look like us and who speak like us and act like us. The thin margins on many projects, such as construction projects, make primes more sensitive to the potential for loss from including an unknown subcontractor than they are to the gain from increased efficiency across the chain or the gain in capacity that enables scaling project delivery. Large company confirmation bias may make them less likely to see what is wrong with the status quo, preferring an if-it’s-not-broke attitude.
Overcoming these distortions in decision-making as buyers and as contractors means slicing through these behavioral missteps. It’s difficult work, but it makes us all better off.
Instead, let’s reframe the question. Imagine a world in which previously small and medium-sized suppliers (many of which are owned, operated, and controlled by members of historically disadvantaged groups) have grown large enough to compete directly for our business. What would it have taken to get them to that point?
As the ultimate buyer, we would want to make the most of our third-party expenditure to help these small and medium-sized suppliers develop.
Full visibility into the supply chain on any given project helps us understand how our spending flows through the waterfall to the different levels of subcontractors. It would also help us combat the behavioral distortions at every level once the prime contractor knew that we, the buyers, were watching. The knowledge at every level that the ultimate buyer could see with complete transparency the full supply chain would motivate the prime contractor to compete subcontractor selection at every level, ideally with an open, level process that landed the best company for the job at each level.
Ideally, this would attract new SMEs as subcontractors. The potential benefit for the prime contractor extends beyond our project to their subsequent bids, as well, if new SMEs get invited to compete again based upon their now-proven experience.
Transparency would also improve our understanding of risk in the supply chain. Think of the chain of contractors from the prime contractor down to the lowest level of subcontractors as a game of Jenga. The failure of intermediate pieces may lead to the failure of the project. Being able to identify potential weakness early enables better risk management.
There should be a way for the participants across the chain to interact with one another for mentorship. Larger contractors can help smaller subcontractors develop capacity and capabilities. They could help the smaller subcontractors obtain financing. They could help the smaller companies grow. This makes the SME suppliers more attractive as future partners.
Small and medium-sized businesses are vital to the development of the economy. Buyers should leverage their third-party spending to include development of these smaller subcontractors as part of the value delivered by the prime contractor. The tool to make this happen is visibility which brings its own additional benefits, including enhanced risk management.
We’re all for big business, but small and medium-sized businesses are a vital component of a growing economy.
This is what we have built at EdgeworthBox: a set of tools, data, and community that makes it easy for primes to light up the entire supply chain .Give us a shout. We’d love to hear from you.
