Executive Briefings

Avoid Strategic Drift in Your 3PL Relationship with a Sound Governance Structure

Even the seemingly most aligned and value-enhancing 3PL relationships can falter badly if the parties fail to “keep up” with each other over the course of their agreement. I call this problem “strategic drift.” It’s a question of good governance, which includes regular communication and meeting cadences throughout the involved organizations. -Kate Vitasek, faculty member, University of Tennessee Haslam College of Business Administration; author of six books on the Vested business model

Face it – business is dynamic and it is important to stay in alignment with your 3PL as “business happens.” Strategic drift is an outsourcing ailment that often occurs the longer a 3PL relationship is in place and the root cause is misalignment due to lack of a sound governance structure.

Strategic drift can create a vicious cycle where suppliers lose sight of priorities and thus can become less proactive in driving solutions to problems or connecting the dots to arrive at new solutions to new priorities. The buying company then thinks the supplier is not proactive enough and starts looking for new suppliers—when in reality it already has a good supplier in front of it. The parties just haven’t done enough work and communication to stay on the same page with each other.

Applying good governance practices can you help prevent strategic drift. Here are six practices that are used to align organizations and avoid strategic drift:

1. A tiered management structure establishes an organizational framework that ensures vertical alignment between the executives and the employees in the organizations that are tasked with getting the work done. This helps ensure that not only day-to-day priorities are executed efficiently, but also that neither party loses sight of strategic goals.

2. Through separate service delivery, transformation and commercial management roles, a Vested agreement by design is meant to drive transformation. The governance structure should promote and drive transformational efforts. The governance organization must support three primary governance roles: service delivery management, transformation management, and agreement compliance.

3. Establish peer-to-peer communications protocols by “mapping” the various individuals into the structure using a peer-to-peer alignment approach commonly known as “reverse bow tie.”

4. Develop a communications cadence or rhythm—a regular cadence is an important aspect of an effective governance structure; formal and regular reporting and measurement processes should include metrics that align performance to strategy.

5. Develop a process to maintain continuity of resources; an agreement is managed by people, so personnel management is another important component of the governance framework.

6. Set a performance management program.

If an agreement lacks a jointly documented governance structure—and unfortunately, far too many do—make sure you address and formally embed a sound governance structure into your contract to eliminate the potential for strategic drift.

The Outlook

A strong and flexible governance structure is essential in any 3PL relationship to prevent buyer-seller misalignment and frustration. Good governance starts with the buyer and supplier co-creating a realistic and flexible governance arrangement that keeps everyone aligned for the long haul. Great governance is when you apply all six governance design principles and formally embed the “rules” of your governance into your contract.

Face it – business is dynamic and it is important to stay in alignment with your 3PL as “business happens.” Strategic drift is an outsourcing ailment that often occurs the longer a 3PL relationship is in place and the root cause is misalignment due to lack of a sound governance structure.

Strategic drift can create a vicious cycle where suppliers lose sight of priorities and thus can become less proactive in driving solutions to problems or connecting the dots to arrive at new solutions to new priorities. The buying company then thinks the supplier is not proactive enough and starts looking for new suppliers—when in reality it already has a good supplier in front of it. The parties just haven’t done enough work and communication to stay on the same page with each other.

Applying good governance practices can you help prevent strategic drift. Here are six practices that are used to align organizations and avoid strategic drift:

1. A tiered management structure establishes an organizational framework that ensures vertical alignment between the executives and the employees in the organizations that are tasked with getting the work done. This helps ensure that not only day-to-day priorities are executed efficiently, but also that neither party loses sight of strategic goals.

2. Through separate service delivery, transformation and commercial management roles, a Vested agreement by design is meant to drive transformation. The governance structure should promote and drive transformational efforts. The governance organization must support three primary governance roles: service delivery management, transformation management, and agreement compliance.

3. Establish peer-to-peer communications protocols by “mapping” the various individuals into the structure using a peer-to-peer alignment approach commonly known as “reverse bow tie.”

4. Develop a communications cadence or rhythm—a regular cadence is an important aspect of an effective governance structure; formal and regular reporting and measurement processes should include metrics that align performance to strategy.

5. Develop a process to maintain continuity of resources; an agreement is managed by people, so personnel management is another important component of the governance framework.

6. Set a performance management program.

If an agreement lacks a jointly documented governance structure—and unfortunately, far too many do—make sure you address and formally embed a sound governance structure into your contract to eliminate the potential for strategic drift.

The Outlook

A strong and flexible governance structure is essential in any 3PL relationship to prevent buyer-seller misalignment and frustration. Good governance starts with the buyer and supplier co-creating a realistic and flexible governance arrangement that keeps everyone aligned for the long haul. Great governance is when you apply all six governance design principles and formally embed the “rules” of your governance into your contract.