We looked in an earlier blog at the benefits for large businesses of working with start-ups and SMEs and how procurement could make a successful connection. Here we investigate why procurement often has difficulties with small businesses and examine SME-friendly procurement practices already in use in pioneering organisations.
Procurement doesn’t engage well with start-ups – why?
Procurement often gets in the way of establishing good relationships with innovative start-ups.
Major corporations seeking the next start-up to rejuvenate their business models are running innovation labs and incubators. Often, suppliers participate in the incubators. But the initiatives are rarely owned by procurement.
In fact, procurement often plays the bad-cop role, creating barriers to the onboarding of new and innovative suppliers, asking for endless compliance documents, ending the magic of the incubation.
Why does this happen? Procurement has expertise in the supplier market. Isn’t it the team best-placed in an organisation to unearth innovative gems?
One difficulty is that not all partnerships with start-ups go through the typical customer-supplier relationship. They might come in other forms like a joint venture, an equity investment or a licensing agreement. And these are traditionally not procurement’s area of expertise. They typically involve other teams from finance.
According to a survey by KPMG, collaborations involving equity (joint ventures, equity investments, acquisitions, etc.) comprise 40% of total collaborations. Customer-supplier relationships comprise only 24% and licensing 19% of the total. Therefore, it’s understandable that procurement does not take the lead in all cases.
But procurement remains an asset. It has a key role in identifying potential targets. What’s more, in those 24% of cases procurement should be on top of the customer-supplier partnerships with start-ups. That is largely not the case.
I can think of at least 3 reasons why.
3 reasons why procurement does not approach startup collaboration well
For one thing, procurement is often not sufficiently aligned with its company’s business. It lacks the understanding to find the next start-up or innovation to accelerate business.
To build relevant partnerships, procurement must grasp its company’s challenges and its future areas of development. It needs to get a broader view. It needs to see beyond the often narrow procurement lens.
This kind of mindset must be instilled by the Chief Procurement Officers themselves – even though business curiosity remains everyone’s duty. This is actually one of the main recommendations produced by Forrester in its Q1 2019 survey about the keys to a successful procurement transformation.
Second, procurement often lacks the time and resources to perform these tasks.
Its resources are too often consumed in labour-intensive activity that has lower added value – like gathering data from scattered legacy systems.
This is where having a powerful digital procurement platform that automates processes and enables actionable analytics is key. You free resources for new value-added tasks.
With such a tool, you could even afford to have somebody specifically in charge of supplier-enabled innovation.
A third and more general problem is that procurement processes are not designed to work effectively with new start-ups.
They tend to favour larger companies, especially under the dependency criteria or volume concentration strategies.
Let’s dig into this aspect of things.
Time frame. To start with, procurement and start-ups work within different time frames.
For start-ups, typical procurement qualification processes take too long. They often require browsing many documents, answering hundreds of questions and attaching several justification documents.
And start-ups often face these obligations before they know about the type of partnership and the benefits that are expected.
On the other hand, decision-making about a qualification process or a purchase order is too slow. Start-ups expect answers in days, not weeks.
Resources. Resources are scarce in start-ups.
Start-up employees often have many functions. They find it very time-consuming to deal with complex organisations with numerous specialised points of contact – one for bidding, one for contracting, one for ordering, one for invoicing, etc.
They want access to the real decision-maker.
Procurement cannot change a company’s complex organisation. However, it can define a single point of entry for start-ups: a person with a strong internal network in the organisation, a deep understanding of the organisational maze and the ability to grasp the particular challenges start-ups face – and how to solve them.
Checks and declarations. A supplier wanting to work with a large company typically has to pass several checks and tests.
This process is designed with bigger organisations in mind. The process includes checking dependency criteria, environmental charters, ethical declaration, quality labels and so on.
The solution here is: start simple. Use a non-disclosure agreement to ensure confidentiality, a letter of intent to ensure motivation and some intellectual property (IP) general rules in case any IP is built jointly.
Invoices. The main concern for start-ups about procurement processes is invoice payment.
Big corporations are often slow at paying supplier invoices. But cash is a matter of survival for start-ups.
This is a critical point in collaboration. Start-ups would rather get less money but get it faster.
This means that a company with an efficient source-to-pay process will definitely have a competitive advantage over its peers when it comes to working with innovative start-ups.
Good procurement practices already in use that are helping start-ups.
Here are good practices already implemented by some best-in-class procurement departments.
First, they have opened a gate for start-ups. Several procurement departments have created a dedicated start-up portal based on the Source-to-Pay solution they use. Some have even interfaced it with public start-up portals.
Second, they have adapted the contracting process to focus only on the essentials of a start-up collaboration. They avoid sending a hundred pages of standard contractual documents at an early stage.
For example, the process could evolve along with the incubation stages of the target that have been defined – for instance a non-disclosure agreement for ‘discovery’, data protection clauses for ‘incubating’ and proof of concept with formal description for ‘pilot’.
Third, they have speeded up decision-making. They have implemented shorter approval workflows for interactions with start-ups: contracts, orders, invoice and payment processing.
Next, they have set up accelerated payment terms. Making these the default for start-ups is a major part of speeding up the payment process.
Finally, they have appointed a dedicated contact person. She or he facilitates start-ups’ interactions with the organisation.
So it’s well worth considering why your procurement department may be struggling to interact well with SMEs and start-ups. And looking at the SME-friendly practices already in use in some organisations can provide key inspiration for changes you can make.
For this reason we will take a more detailed look in part 2 of this blog at use cases from pioneering large companies.
For more information on how Ivalua can help you work better with SMEs, go to ivalua.com