Procurement vs procurement

Thanks, Jason, for your recent links and the extra traffic that has come my way as a result. I hope some of you new readers stick around and weigh in via the comments.

I haven’t posted for a while and I hope this posting goes some way to make up for the absence. I’ll be back to posting about e-auctions next week, but in the meantime here are seven strands, weaving between IT and Procurement. In my view, two very similar departments/functions/processes. I’d be interested to hear your views on how the strands pull together.

Strand One: A quick glance at the recent history of the IT department

My background before ending up in Procurement/Sourcing/Purchasing/SCM (whatever you want to call it) was in the IT space. 20 or 30 years ago, I am told, the IT department was a musty backwater. Then, with things like ERP systems and the Internet boom, IT became more important, more “strategic”. You heard more talk about IT being a strategic asset and not a support function. You heard more about CIOs (Chief Information Officers) and CTOs (Chief Technology Officers) and whether they should be on the board.

Then the wave of excitement began to recede. IT started began to lose its mystique. Some companies started even eliminating their CIO/IT Director roles. Some companies even pushed out responsibility for IT equipment directly to end users. And now, insofar as people talk about CIOs or CTOs, they are clear that the role is as much a business role as it is a technical role.

Strand Two: Procurement becomes more strategic

Claire Brabec-Lagrange , vice-president, purchasing, at Thales, quoted in CPO Agenda’s Autumn 2007 executive debate.

As well as our two to three-year operational plan, we also have a strategic business plan for the next five to 10 years. In the past, purchasing was not part of this exercise, which mainly involved sales and strategy, operations and technology. Now we are part of this strategic exercise and this has made a huge change because it has led purchasing to get closer to sales and strategy in order to understand where the business wants to go and what will be the requirements in sourcing. What are the core technologies that we need to have in-house? What are the key enablers we need to source outside? Who are the key competitors out there and are they our suppliers? Do we have to go to Asia because the business in aeronautics is moving to Asia? How are we going to source locally for local needs? By being involved at this stage we are recognised as being business partners to the sales people, to the technology people and globally to the strategy.
It is the first year we’ve been integrated in this strategic plan and three divisions have been through this exercise. I convinced the business that if we are a strategic function we need to be involved in this strategic plan, otherwise we are just executing purchasing orders.

Strand Three: Procurement have proved they can source goods and services. What about becoming the organisation’s recruiters?

Some quotes from Supply Management magazine 28 Feb 2008 in a news article entitled: Buyers: the new recruiters?

Chrisk Sawchuck (Hackett): “Other functions are trying to work out how to source talent. Why can’t procurement take a leadership role in that? It is the business process of sourcing.”

and

Christina Langley (Langley Search & Selection): “The best purchasers are good at building relationships. They often make good recruiters in today’s tight markets for staff as it is important that companies build strong relationships … Buyers are able to make the jump from sourcing goods and services to sourcing people.”

Strand Four: Hell, Procurement can do anything at all

Genentech’s CPO, Clive Heal, interviewed in CPO Agenda in summer 2006.

One of the initiatives we ran last year was focused not only on the cost elements, but also how we could improve the business process to make it faster and much more efficient. I believe there are opportunities for procurement to support revenue generation – not from suppliers, but helping the business to grow at the top end. That moves us beyond the term “procurement”, which in itself is a constraint and will need to change.

Strand Five: Hang on, sourcing isn’t as simple as that. You need special understandings to do procurement in different areas

A recent post from Deal Architect talking about the complexities of sourcing IT services.

I know I am being critical of my own clients in saying so, but like I wrote here , I wish more procurement folks would treat IT spend, not just IT services, as very different from MRO or other direct spend, not just try to find homogeneous “solutions” .

Strand Six: So do you really need a procurement department to negotiate supplier contracts?

I’ve just been reading an interview with the new Chief Executive of CIPS (the UK version of ISM) in Supply Management 28th Feb 2008. His background is not procurement though in his previous role he

… brought together six associations. One of the first jobs we did was to renegotiate their contract with the outsourced supplier … So on behalf of 55 clients I was responsible for a team that negotiated a new commercial contract, compliant with regulations, requirements and complete with service level agreements … I now recognise that many of the issues we wrestled with … as procurement issues … Should we provide these services in-house, or in collaboration with our competitors, or through an outsource provider? How do we create a relationship … which works well for both sides [buyer and supplier] and reflects the reality that each depends on the other? And against that background some hard negotiators trying to get a better deal.

Asked whether any procurement professionals were involved, his answer is instructive:

I wasn’t aware of the label [procurement] then so it never occurred to me to ask my negotiating team. I think they were probably chief operating officers, who would be responsible for back office functions and negotiating such an outsourced contract.

Strand Seven: Procurement is a process, not a department

Pierre Mitchell’s excellent comments likening procurement with Six Sigma.

“Procurement is a set of processes, not a department … Procurement doesn’t have to own it, but it should continually be expanding its circle of influence to influence the process more deeply and make sure that the organization does it – regardless of where the reporting lines are … think about Six Sigma – it’s not a professional quality function that does it, but rather a mass deployment of the best practices to the masses.”

Pulling the strands together

The Procurement department has been following a similar trajectory to the IT department. But half a decade or a decade behind. We are now at the point where CPOs are making their mark on corporations and even moving onto the board. Claire Brabac-Legrange and Clive Heal are ambitious enough to try to drive procurement to greater heights in their organisations – or even to transcend the moniker “procurement” for good.

But how to take procurement (or Procurement) to the next level?

Just because good buyers are good at building relationships does not mean that other people are not good at this. It doesn’t follow that recruitment should come under the control of buyers. It’s worth contrasting the Sawchuck quote with the Langley quote. Sawchuck argues that Procurement should take a lead in sourcing people. Langley goes further and says that buyers themselves make great recruiters. Sawchuck sees procurement as a process, with its practitioners taking the lead in sourcing stuff. Langley sees Procurement as the buyers themselves doing the buying – as a department.

Particular categories require particular expertise to source effectively. They cannot simply be subsumed into a monolithic procurement process. This is the case for the IT services Vinnie Marchandi describes; it certainly is the case for recruitment. And no less than the current Chief Executive of CIPS, in his previous role, was able to consolidate spend and negotiate with suppliers without formal Procurement people involved. procurement is a process after all. Every function needs to procure.

Back to IT for a moment. As IT became all pervasive, companies actually started relying less and less on the IT department. The same is bound to happen in procurement. As the process of procurement  (little p) becomes better understood and takes centre stage the role of the Procurement department (big P) itself will become less important.

Or is the future you envisage one in which the Procurement department becomes the mirror image of the Sales function, handling all the inputs to the business?

Sales vs Procurement

Steve Bagshaw from Supply Management recently posted a blog entry regarding an article they printed in 2003 about “Killer Sourcers“.

The feature explained how a new breed of purchasing professional was being developed. These buyers were ruthless negotiators with little care for supplier relationships or management.

It seems that the opposite is true now, with companies investing a huge amount of money and time in working with, rather than against, their suppliers.

A while ago I posted a tongue-in-cheek joke from an IT sales person who said that procurement managers, while they talk a good talk about quality, only care about lowest unit price. Then last week I posted some comments from an organisation researching into supplier attitudes to e-auctions.

And here’s a webinar directed at another procurement tool that sales people apparently loathe: RFPs. SAMA  is hosting a Webinar on Feb 21st, entitled The RFP Antidote: a cure for procurement headaches.

The blurb for the webinar:

You may have developed great relationships with end users, coaches and economic buyers when suddenly a strategic sourcing or purchasing person comes into the picture and demands that all communication has to go through them. Then they don’t (or won’t) understand the value proposition, disregard your longstanding relationships and say “All I care about is price.”

This webinar will offer strategies and tactics that SAMs are successfully using to mitigate the impacts of procurement and competitive RFPs.

The webinar is being run by an organisation called Factor R which advises suppliers how not to lose their existing clients. Here’s a document outlining some of their recommendations. It is worth reading for procurement professionals.

I’m reading between the lines a bit here but I think I’m broadly on track:
1. Try to deflect procurement’s involvement if possible (e.g. arguing that an RFP is not appropriate in the current climate, etc)
2. If that isn’t going to work then meet your client and show them other ways they can achieve cost savings (e.g. through consolidating more spend through them, upgrading to avoid replacement costs, process efficiency savings by doing something else)
3. Demonstrate that your client already has a great deal because most of your deals since you sold to them have been at a higher price
4. If that isn’t going to work then see if your client will let you write the RFP

At first sight this seemed pretty alarmist.

On second reading the content is pretty smart advice.  And, you know what? From having been on the receiving end of having to complete RFPs I can sympathise with sales people who get faced with a large document that doesn’t seem to ask any of the “relevant” questions (by “relevant” I mean the ones you wish the buyer had asked).

For sure, sales people will always want to sell as little as possible for as many $$$ as possible. And on the other hand, procurement will always want to get as much as possible for as few $$$ as possible. But is it true that, away from the verbiage spun out by pundits (including this one) that procurement really only cares about driving down unit costs? Or if, as Steve Bagshaw suggests, times have indeed changed within procurement, how long will it take for this news to filter through to the sales people?

My view: the world is not so binary as “price only” or “collaborative supplier relationships”. Here’s a good article from CPO Agenda (from 2005 but serendipitously popped into my RSS reader yesterday). A sober analysis of how a more collaborative approach with your suppliers works well sometimes, but not all of the time.

Supplier Perspectives on eAuctions

Recently Andrew Moorhouse of Huthwaite International made a guest posting about some research Huthwaite has done on how suppliers can deal with eAuctions.

Here are some updates from Andrew following his presentation of those findings to sales people at a SAMA conference. The comments are pretty candid and will make for interesting/concerning reading amongst buyers. Despite efforts by providers to develop codes of practice or auction ethics it seems that suppliers experience the reality of eAuctions quite differently. Over to Andrew:

One key theme evident during both presentations is that suppliers do not trust procurement to behave ethically when running a reverse auction.
Far from being an ‘open and transparent’ event, many delegates shared stories how procurement would not commit to a contract award date or be explicit on how the auction would be awarded. Indeed, it seems that procurement professionals attempt to trick suppliers into believing they have to be the cheapest to win.  When we presented TradingPartners’ advice about ‘guaranteeing to meet the first place bidder immediately after the auction’ this further fuelled the debate on how procurement is behaving deceptively.

When they hear procurement state, “It is our intention to award the contract to the lowest placed bidder” or, “We will meet the first placed bidder after the event” naive sellers are influenced by these conditioning statements and it does affect their bidding strategies.

Only after participating in 4 or 5 reverse auctions do sellers realise that procurement indeed reserve the right to award the contract to any participant and that price is not the sole criteria. One key research finding came from analysing the incumbent’s final bidding position: 93% of successful incumbents won the contract without being the cheapest and the median final rank was third!

Moreover, forget about shill bidding: certain global account managers have such a distorted impression that they believe there are ‘backdoors’ to the e-procurement systems where the buyer can manipulate the supplier’s bidding rank! Of course we know this is not true, but it helps to illustrate how critical it is for a completely open and transparent process.

From the research we conducted, the biggest areas of concern around procurement’s behaviour are:

1. Lack of transparency on award criteria
80% of the time, the contract is not guaranteed to first place bidder, but procurement condition suppliers into believing they have to be the cheapest to win.

2. Invited suppliers are not equally qualified
Sellers are starting to realise that procurement allow both low cost and high quality bidders in the same event and reduce bidding transparency (and the chance of being caught) by using a ‘Rank Only’ bidding format.

3. Auction specifications are ambiguous
Over half of auctions analysed have ambiguous specifications that allow room for interpretation by competing suppliers, with huge implications for both the buying and selling organisation.

4. The reverse auction is rarely the end of the decision process.
In our research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, ‘lowest bidder wins’, post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen!

5.  Cost of participation
Suppliers spend hundreds of man-hours planning and preparing for auctions and then are faced with further negotiations and discussions. No delegate discussed how this reduces their cost of sale.

Finally, I remember the article you linked to by Tim Minahan http://supplyexcellence.com/blog/2007/12/10/reverse-auction-throwdown/ who stated, “When managed properly, reverse auctions require buyers to clearly define their specifications, rules for engagement, and award criteria at the outset of the process.”

However, as we see from our research and conference insights, this clearly is not happening today.

The full whitepaper will be published on 28 February and I can give you a link for downloads at this time

eWorld: Hackett Group’s Procurement Capability Maturity Model

Hackett were presenting their capability maturity model for procurement yesterday at eWorld. It is designed to address the questions: “What is the future of procurement?” and “How will the value proposition of procurement effectiveness evolve?”

Hackett’s model shares a lot with the CMM models already widely used in IT (in that it has the same name and also has five stages of increasing maturity). Though it also leans on the Maslow hierarchy of needs in that each of the 5 levels is not a replacement for the previous level but builds on the previous level in the hierarchy. The levels are:

1. Supply Assurance (“Right goods and services at the right time at the right place”)
2. Price (“Right goods and services AND at the right price”)
3. TCO (“Shift from lowest price to lowest Total Cost of Ownership”)
4. Demand Management (“Reduce demand activity,  complexity immediacy and variability”)
5. Value Management (“Increase business value derived from spend rather than just reducing total cost/spend”)

Level 1 is about processing POs
Levels 2 and 3 incorporate strategic sourcing
Levels 4 and 5 are something completely new and different for many procurement departments.

What I particularly like about this model is that it makes clear how, as procurement moves up the value chain, it moves from being one focussed just on Supply Management (levels 1 to 3) toward Customer Management (levels 4 and 5). If level 1 is about processing purchase orders and levels 2 and 3 are about strategic sourcing then levels 4 and 5 are a massive paradigm shift in how procurement relates to the business.

This gives an interesting path for procurement professionals but also presents a challenge and a dilemma. The skills and mindset needed to succeed at levels 4 and 5 are likely to be massively different to those needed to succeed in levels 1, 2 and 3. It may well be a new breed of leaders who elevates procurement to the heights of levels 4 and 5.

Incidentally, this presentation was billed as the “unveiling” of Hackett’s Procurement CMM model. I spoke to them after the presentation and asked how much of this info would be public domain and how much would be private for their clients only. The answer wasn’t that clear. They seem to be still trying to figure out how to market it widely whilst also retaining control of generating revenue from the information. For example the paper they were giving out at the event has written all over it: “For Current Members of Executive Advisory Programs Only”. However they were giving this document out freely at the eWorld event. I do hope they take the step of putting more of this model into the public domain to encourage more rapid take-up of their model.

eAuction Design: eWorld Purchasing & Supply 2008

I’m doing a talk about eAuction design Tuesday 12th and Wednesday 13th Feb at eWorld Purchasing & Supply 2008. It will be based on some of the content I’ve been preaching at CIPS branches up and down England but in addition I will be sharing 5 tips you can use to make your eAuctions more effective. Hope to be able to meet some of you there: 11.05am. Session F.

At the same time BravoSolution are taking a public sector focus to e-sourcing and there are a couple of sessions flying the green flag.

Other talks that look quite intesting from an e-sourcing perspective:

  • Zycus will hopefully let us  know how far they have simplified e-sourcing.
  • SAP (well, Frictionless) are doing a closing session on the 13th

Plus the predictable green-tinged presentations. Hopefully they will come up with something more interesting than “you can save money and be green at the same time by using less packaging”.

Contrasting Savings Calculations: Procurement vs The Business

Obviously as someone working in the eAuction space I am love learning how other people measure their savings. Here’s an interesting article on the subject from Next Level Purchasing:  http://nextlevelpurchasing.com/articles/calculating-cost-savings.html.

It points out the fact the executives like to see Procurement deliver year on year cost savings, but Procurement might be doing better to lock in longer term cost savings now. This presents a dilemma which Next Level articulate very well:

Imagine this situation:
* You are responsible for buying a certain item
* Last year, you bought 10,000 units of the item at $100 each
* This year, you’ve signed a 3-year contract with your supplier
* The contract price is $90 per unit of the item
* You will buy 10,000 units of the item in each year of the contract

[S]enior management expects to see a reduction in expenses from the previous year to the current year. So, in the scenario described, your expenses will not be reduced by $300,000 this year – they will only be reduced by $100,000 which is this year’s quantity multiplied by the difference in price.

Next Level take the very pragmatic view of:

One way is to negotiate a price that declines each year during the contract. For example, instead of starting at the $90 price, you would negotiate the price to be $95 in the first year, $90 in the second year, and $85 in the third. While the contract value is the same to the supplier, you’ll get to report savings in each year of the contract and senior management will recognize three years of year-over-year expense reductions.

This raises some very important points and shows what can happen when Procurement and The Business are not aligned fully in their objectives.

  • Procurement looks good because they have achieved a $5 decrease year on year for 3 years
  • The Business suffers because, although on average over the 3 years you are paying $90, in year one you are paying $5 more per piece. In effect The Business has to wait till year 3 to get the extra $5 back.

This has serious cash flow implications. If you go down this route then you have deprived the business of $50,000 in cash in year 1 that The Business could be using for investment in capital, marketing, etc.

On top of this, by the end of year 3 you have got to $85 a piece. So what then happens in years 4, 5 and 6? Given the fact that you are already on $85 a piece will you get a further cost saving? Or will you end up having to swallow a cost increase to $90? Will the fancy footwork you did to make yourself look good in years 2 and 3 just postpone the issue of how to continue presenting year on year savings to the business?

Now I know the situation that Charles describes happens all the time. And I know that keeping some savings in reserve is a tried and trusted procurement tactic. But this issue does point to a major disconnect between The Business and Procurement, if their interests go in opposite directions.

For procurement to become a true strategic partner to the business, this disconnect is what really needs to be addressed.

Hell, some procurement leaders I am aware of are even questioning the value of reporting savings, precisely because of issues such as this. Now that would be an impressive step: What do purchasing do apart from delivering savings and ordering paperclips? Procurement would really have to figure out another way of demonstrating value add.

In the meantime, while you are still working on your savings, take a leaf out of Steve Mallaband’s book.