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Weekly Thoughts: Service Provider Nirvana

Here is something that caught our eye this week:

Service Provider Nirvana

We have been thinking recently about how to effectively select service providers. As small businesses, our portfolio companies (and Chenmark itself) rely greatly on third-parties to provide insight on a variety of topics including benefits administration, digital marketing, workers comp, legal matters, and equipment leasing, among others. Call us naive, but in our ideal world — Chenmark Service Provider Nirvana — we would form a small number of long-term arrangements with vendors that act like trusted partners who proactively highlight issues and work with us to manage problems and see around corners.

While we have been fortunate enough to establish a few such relationships, all too often we find that positive impressions at the initial point of contact give way to eventual disappointment for reasons ranging from technological limitations, to fees that were not explicitly disclosed during pricing conversations, to, perhaps most infuriating, the suggestion on the part of the service provider that we hire somebody internally to manage complexities that arise from a growing, yet decentralized, model. Our first instinct in such situations is to systematically introduce a degree of competition. On this point, we recently read Robert Townsend’s 1970 cult classic, Up the Organization: How to Stop the Corporation from Stifling People and Strangling Profits, which suggested:

“Like other suppliers of services (CPA’s, commercial bankers, cleaning ladies, and lawyers), investment bankers work better if they sense that you aren’t married to them. You should try to keep at least one alternative waiting eagerly (or at least waiting) in the wings…. While working with your current lawyer or banker, you give him every opportunity to do a good job. You are entitled to expect excellence from him. If you don’t get it over a period of time, you had best change firms. It is usually easier to change firms than to reshape a relationship that has gone sour).”

Taking Townsend’s advice to heart, we have made a regular practice of evaluating multiple service providers per vertical, but have traditionally done so sporadically and often in response to a problem. Going forward, we are focusing more time on establishing disciplined investigative processes for vendor review in an effort to drive accountability but also fairness, transparency, and consistency. We recognize that small problems will occur in any relationship and we want to create a process to ensure excellence while also avoiding time-consuming overreactions.

More broadly, it occurs to us that most supplier relationships break down due to a mismanagement of expectations. Somewhere along the line, a deadline was missed, a fee wasn’t disclosed, a call wasn’t made, or an assumption wasn’t clarified. This behavior, in turn, has a profound physiological effect as James Archer noted in a blog post we recently read:

“When something happens better than we expected, our brains receive a burst of dopamine, a neurotransmitter associated with reward-motivated behavior. It makes us feel good. In fact, we even get a little burst when things merely go according to plan. It helps us feel good, safe, and happy. However, when we’re expecting something good–or even just regular–to happen, but it doesn’t, we feel that loss of anticipated dopamine acutely. It’s as if we lost something that was supposed to belong to us, which kicks in our feelings of anger and injustice. David Rock, author of Your Brain at Work, describes it like this, ‘If we expect to get x and we get x, there’s a slight rise in dopamine. If we expect to get x and we get 2x, there’s a greater rise. But if we expect to get x and get 0.9x, then we get a much bigger drop.'”

We can certainly point to moments when we have “felt the loss of anticipated dopamine” particularly acutely when dealing with service providers. However, we also recognize that expectations management is not a one-way street. Chenmark strives to support its operating companies in the same way our companies strive to serve their customers, and sometimes even the best intentions result in a disappointed counterparty. As such, we hope our efforts to create Service Provider Nirvana will yield not only better supplier relationships, but also valuable insight into how we can improve our own service delivery to all our stakeholders.

 
Have a great week,

Your Chenmark Capital Team

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