By: Ipsita Suman -- Principal Analyst, Indirects
07 July, 2019
Often times there are cases where the potential supplier is already a customer. It even seems appealing to go for a win-win relation, where both parties cut a deal to ‘thrive’ together; low costs make it possible to provide goods/services even in the most difficult external situations. The possibilities are endless.
Every organization struggles with ethical issues while conducting reciprocal business. Reciprocal business in itself is not unethical. It is perfectly alright to buy from customers. However, if reciprocity creeps in, that is, if at any point during negotiations, a potential supplier is given importance just because the supplier is an existing customer, it kills competition.
Procurement Organizations have to be highly aware of all the reciprocal business engagements in the organization and extra careful when negotiating with suppliers who are already buyers. C-level involvement and collaborative relationship is the key to maintaining peaceful reciprocal business.
Reciprocity is both a legal and ethical issue that could lead to legal sanctions against an organization, its management, and/or its supply management personnel.
Reciprocity can be viewed as a form of partnership, or means to encourage each other’s business.
However, at any instance, if the intent behind the partnership is questionable, this reciprocity is deemed unethical and punitive.
What Does Reciprocity Mean?
What Constitutes Reciprocity?
When Is Reciprocity Acceptable?
Laws Against Reciprocity—Antitrust Laws around the World
Federal antitrust law requires a supplier to sell the same item to all customers at the same price (assuming the same purchase quantity).
Clayton Act lists the specific practices that are unlawful; here, the effect may substantially lessen competition or tend to create a monopoly.
The Competition Act gives the Competition Commission powers to investigate complex monopoly conduct in a market.
The Act prohibits any agreement between parties that substantially prevents or lessens competition, unless it can be justified on grounds of technology, efficiency, or other procompetitive gains.
The focus is on issues such as promotion of small businesses, interests of employees, and black economic empowerment.
Sherman Act makes it illegal for parties to act in combination, conspiracy, or collusion with intent to restrict competition.
Price fixing, reciprocity, and group boycotts fall within the parameters of this law.
How Can Procurement Organizations Contribute?
In reciprocal business, the main idea is collaboration and mutual development. At no point should one party be coerced or forced into business.
Sensitive matters such as reciprocity can be best handled at the C-level. A top-level discussion on selection of partners for reciprocal business is essential to have a high-level, long-term vision of the relationship.
Before going into negotiation, the procurement team should ensure that the business relationship would not be hampered in any way. This can be done by the internal teams conducting a thorough analysis on the business relationship.
Governance teams can help eliminate reciprocity by creating a bridge between the sales and procurement teams.
Things to Remember in Reciprocal Business
Factors to Consider for Success
To maintain the highest ethical standards, all purchases of organizations must be based on the suppliers’ quality, price, and reliability.
An organization using reciprocity as a purchasing tool would limit its ability to create healthy competition and would eventually jeopardize the suppliers’ quality, price, and ability to compete.
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