agile# How to Use First Principles Thinking to Manage External Vendor Relationships in Entertainment Marketplace (1/36)
An entertainment marketplace scale-up running Scrum with a team of sixteen to fifty people has a vendor relationship problem. The company runs a platform connecting event venues with entertainment providers. It handles booking, scheduling, payment processing, and reviews. The company has been around for five years with one hundred and forty two employees. Product development has thirty one people across three Scrum teams of ten to eleven each. (2/36)
The external vendor relationships are a mess. Four vendors are costing the company one hundred and two thousand dollars per quarter in above-market rates, unused resources, auto-renewing contracts, and bloated features.
Vendor one is Adyen, the payment processor. The contract charges three point two percent per transaction, above the market rate of two point five percent. That costs forty one thousand dollars per quarter. (3/36)
Vendor two is AWS, the cloud infrastructure provider. The contract is complex and the company is paying for unused resources. That costs twenty eight thousand dollars per quarter.
Vendor three is Cloudflare, the content delivery network. The contract auto-renews and pricing has not been reviewed in two years. The company is paying above market rates. That costs nineteen thousand dollars per quarter. (4/36)
Vendor four is Zendesk, the customer support platform. The contract is bloated with features the company does not use. That costs fourteen thousand dollars per quarter.
These relationships need to be managed. Elon Musk built Tesla and SpaceX on first principles thinking. His model was simple. Musk realized the biggest problem in business was the tendency to reason by analogy. People accepted existing solutions and paid existing prices. High costs killed companies. (5/36)
Musk attacked that tendency. He created first principles thinking based on one principle: break the problem down to the fundamentals, question every assumption, rebuild from the ground up. Breaking the problem down meant identifying basic truths. Questioning every assumption meant challenging existing solutions. Rebuilding from the ground up meant creating new solutions. That combination built Tesla and SpaceX. (6/36)
When Musk faced a vendor problem, he did not accept the vendor's price. He broke the problem down to the fundamentals, identified the actual cost of raw materials, labor, and overhead. Knowing the fair price gave him leverage to negotiate. That approach built SpaceX. (7/36)
Musk applied the same thinking to battery costs. He broke the battery down to its raw material cost of eight hundred dollars per kilowatt hour. Knowing that floor let him negotiate the price from six hundred dollars down to one hundred and fifty dollars per kilowatt hour. That reduction built Tesla. (8/36)
For an entertainment marketplace scale-up, the vendor relationship problem is the same. The mess costs one hundred and two thousand dollars. Musk's first principles thinking says: break the problem down to the fundamentals, question every assumption, rebuild from the ground up. Breaking down creates knowledge. Knowledge creates leverage. Leverage eliminates waste.
## The Core Principle (9/36)
Musk's first principles thinking was built on a simple insight. The best way to manage vendor relationships is to stop accepting contracts at face value. Stop reasoning by analogy that this is just how much things cost. Start breaking every vendor relationship down to its fundamental components. Question every assumption about pricing, terms, and usage. Rebuild the relationship from the ground up based on what the actual value and cost should be. (10/36)
Musk did not manage vendor relationships at Tesla and SpaceX by accepting prices and signing contracts and hoping for a fair deal. He broke every relationship down to the fundamentals, questioned every assumption, and rebuilt from the ground up. The breakdown created knowledge. The knowledge created leverage. The leverage created better deals. The better deals saved money. (11/36)
For an entertainment marketplace scale-up, the approach is the same. Break the problem down to the fundamentals. Question every assumption. Rebuild from the ground up. The breaking down creates knowledge. The knowledge creates leverage. The leverage eliminates the waste.
## Four Steps to Apply First Principles Thinking
1. Break Down Every Vendor Contract to Its Fundamental Components (12/36)
Musk broke down every vendor contract at Tesla and SpaceX to its fundamental components. Identifying the actual cost meant knowing the fair price. Knowing the fair price meant being able to negotiate.
Break down every vendor contract to its fundamental components. Identify what you are actually paying for versus what you actually use. For an entertainment marketplace scale-up, the breakdown looks like a three hour workshop with two steps. (13/36)
Step one is to list every line item. That creates transparency so the team can see what it is paying for. Last quarter, the procurement lead broke down the Zendesk contract into fourteen line items. Line item one was the professional license at forty nine dollars per agent per month for twenty two agents, totaling ten thousand seven hundred and eighty dollars per month (14/36)
. Line item two was advanced analytics at twenty five dollars per agent per month, totaling five hundred and fifty dollars per month. The company does not use advanced analytics, so that five hundred and fifty dollars is waste. Line item three was custom roles at fifteen dollars per agent per month, totaling three hundred and thirty dollars per month. The company does not use custom roles, so that three hundred and thirty dollars is waste (15/36)
. The remaining ten line items were listed the same way, creating a complete picture.
Step two is to compare what you pay for versus what you use. That creates a gap analysis that reveals waste. Last quarter, the gap analysis revealed the company was paying for six features it did not use. Those six features cost fourteen thousand dollars per quarter. Eliminating that waste saved fourteen thousand dollars per quarter. (16/36)
For a Scrum team of sixteen to fifty, the vendor contract breakdown should be a workshop with at least two steps that creates a gap analysis. For Scrum, the breakdown should be part of sprint planning as a planning activity.
2. Question Every Assumption About Vendor Pricing
Musk questioned every assumption at Tesla and SpaceX. Challenging existing prices meant being able to negotiate. Negotiating built Tesla and SpaceX. (17/36)
Question every assumption about vendor pricing by researching the fundamental cost of each service and determining what a fair price should be. For an entertainment marketplace scale-up, the questioning looks like a two week research project with three activities. (18/36)
Activity one is to research the market rate. That creates a benchmark. Last quarter, the procurement lead researched the market rate for payment processing and found it was two point five percent per transaction, below the current rate of three point two percent. That zero point seven percent difference costs forty one thousand dollars per quarter. (19/36)
Activity two is to research the fundamental cost. That creates a floor, the minimum cost of providing the service. Last quarter, the procurement lead found the fundamental cost of payment processing was one point eight percent per transaction, covering network fees, fraud detection, and compliance. Knowing the floor means the fair price sits between one point eight percent and two point five percent. (20/36)
Activity three is to determine the fair price. That creates a target. Last quarter, the procurement lead set the fair price for payment processing at two point three percent per transaction. That would save zero point nine percent per transaction, or forty one thousand dollars per quarter. The procurement lead determined fair prices for all four vendors and used those targets in negotiations, saving sixty three thousand dollars per quarter. (21/36)
For a Scrum team of sixteen to fifty, the assumption questioning should be a research project with at least three activities that creates a fair price target. For Scrum, the questioning should be a sprint backlog item.
3. Rebuild Each Vendor Relationship from the Ground Up
Musk rebuilt every vendor relationship at Tesla and SpaceX from the ground up. Renegotiating contracts based on the fair price created better deals. Those better deals built Tesla and SpaceX. (22/36)