I recently wrote this post on Procurious about Diageo’s decision to alter its payment terms with UK suppliers. The overwhelming majority of you were vehemently against the practice of lengthening payment terms to pump up buyer’s coffers at the expense of suppliers.
Well it seems that Diageo, with a little encouragement from the UK government, has elected to back away from its decision to lengthen payment terms.
The company announced last Friday that it would commit to maximum 60-day terms with its small suppliers rather than the 90 days it proposed last month.
Prompt payment code
The decision is thought to have been sparked by the UK government’s recent strengthening of the Prompt Payment Code (to which Diageo is a signatory). The code looks to ensure that suppliers receive payment within a reasonable timeframe and are hence able to meet their cash flow commitments.
Diageo faced pressure from groups like the Forum of Private Business who were calling for beverage giant to be cut from the codes list of signatories as result of its decision to extend terms with suppliers.
At the announcement last Friday David Cutter, Diageo’s president of supply and procurement said:
“We fully recognise the importance of SMEs to the UK economy and to the sustainability of our own business and therefore we will commit to a maximum 60-day term for all SMEs in the UK.”
While the back down is good news for small British suppliers, the way the media statement was positioned suggests Diageo will continue to push the extended payment terms with its larger suppliers. Which begs the question… Who is large and who is small?
The first blog I wrote on Procurious was about McDonald’s horror year in 2014. One of many glaring supply chain issues for the fast food giant was its mismanagement of the industrial action that took place at ports on the US west coast in 2014.
This week something sparked me to go back and see where things had got to with regards to these disputes. What I found was interesting to say the least.
Busy making other plans
While dockworkers were negotiating new contract terms, causing work operations at the ports to grind to a near halt, it appears supplier chain managers across the world were busy formulating back up plans.
Despite longer transit times from the buoyant Asian markets and increased shipping cost, many supply chain managers elected to re-route shipments paths from their original west coast destinations to east coast ports (via the Panama Canal), or though neighbouring Mexico and Canada in order to avoid the rigmarole these disputes have caused.
Those involved in the west coast shipping industry surely would have cringed at stats released last week suggesting that, for the month of January, year-on-year cargo figures have dropped by 28 per cent at the port of Los Angeles. The port of Oakland estimated even greater losses with cargo volumes shrinking by 32 per cent for the month of January.
They’re not coming back
Perhaps the area of greatest concern for the west coast shipping industry is that these sorts of decisions tend to be sticky. Firms that have made a commitment to alternative shipping routes (largely through frustration) are unlikely to resort back to west coast ports now that the industrial action is over. This is exemplified in the findings of a survey released by the Journal of Commerce last week, which suggested that 65 per cent of shippers planned to move less cargo through west coast ports in 2016.
The importance of supply chain flexibility
Supply chain flexibility means that firms are now less reliant on individual ports than ever before. Aside from fresh produce, most goods can ship from alternative destinations, meaning that supply chain managers now have more options around how they move their goods. Sure, it may take longer, but with proper planning, a steady, reliable supply can in fact be established, something that west coast ports failed to offer in 2014.
Speaking on the losses and challenges the industrial action has created for the Port of Los Angeles, the organisation’s executive director, Gene Seroka, stated: “About a third of our cargo is purely discretionary, some of that cargo has moved to other port complexes. It’s going to be extremely difficult to earn that business back.”
When the cat is away the mice will play
While west coast ports are seeing significantly lower traffic flows, there has been a corresponding up turn in activity on the east coast, with the Port of Virginia seeing a 15 per cent increase in cargo figures. It’s also thought that the planned expansion of the Panama canal will make east coast ports even more attractive options for goods coming or going to the lucrative Asian market. The expansion of the canal, despite numerous complications, is due for completion next year.
So, while the industrial action has stopped, it seems like the impact of these disputes are yet to have fully played out for the west coast’s shipping industry. Can they make up for lost time?
Garment workers getting paid £3 an hour, it’s a claim we’ve sadly become accustomed to over recent years. As our appetite for fast fashion and low prices continues to grow, clothing retailers continue their search for cheaper and faster ways to produce the clothes we wear.
Although these disturbing headlines are becoming more frequent, we normally associate them with outsourced foreign workforces in the developing world, which makes a recent report from the University of Leicester quite unique.
The report titled, New Industry on a Skewed Playing Field: Supply Chain Relations and Working Conditions in UK Garment Manufacturing, claims that low wages, a lack of worker rights and poor safety standards are not reserved for garment workers in the developing world and are in fact present in the United Kingdom.
A growth industry
After a period of decline in the early 2000’s, driven largely by outsourcing to the developing world, the UK clothes manufacturing sector has seen a remarkable revival. It’s estimated that between 2008-2012, when most of the country’s economic activity was contracting, the garment manufacturing industry grew by almost 11 per cent.
A significant amount of this growth has been attributed to the proliferation of the ‘fast fashion’ business model, exemplified by firms like Zara and H&M. Fast fashion, dictates that clothes be produced in small batches and delivered to stores very quickly, if the items sell, the store will order more. The model is thought to be successful because it not only reduces the time taken to get fashion from the runway into stores, but also allows retailers to hold much lower inventory levels, maximising their cash flow.
Clearly, the need for speed in ‘fast fashion’ has meant that producing garments offshore has become less appealing and many firms are now looking to source much closer to home.
UK Garment Workers
The report which focuses its efforts in Leicester, the traditional hub of British garment manufacturing, suggests that while ‘fast fashion’ has driven a revival in the British garment industry, the requirement for quick, cheap clothing has meant that British workers have been exposed to less than ideal working conditions.
Wages for the workers surveyed came in at around £3 and hour (less than half of the national minimum wage of £6.50), these wages were generally paid cash-in-hand and most employees held no contract of employment or workers rights. The report estimates that these underpaid wages would amount to roughly £1 million a week.
As well as inadequate wages, workers raised concerns over poor safety standards, verbal abuse, threats and health problems in the workplace.
Exploiting the vulnerable
The report suggests that the largest group of workers exposed to these poor conditions were women who have been living in the UK legally for more than 10 years, but possess a level of English insufficient to find other work opportunities. Also exposed to the employment law violations are groups of workers that don’t hold the requisite paperwork to legally work in the United Kingdom, these employees tend to work at an even lower rate of pay than the others survey in the study.
Structural change is required
The report points to the fact the large retail organisations buying garments from these small factories need to take greater responsibility for the activities in their supply chains – this is a point I’ve argued often on Procurious. However, I do feel that in the case of ‘fast fashion’ operations, we as consumers need to take some the blame for these practices.
Our desire for ridiculously cheap, ‘fast fashion’ has created an fashion industry where margins are so low that supply chains must be as lean as possible in order for organisations to stay competitive. This rampant competition to the lowest price point is resulting in the exploitation of workers. Whether workers are located in Bangladesh or Leicester is irrelevant. As long as we, as consumers, continue to drive demand for £3 t-shirts and jeans, we are fuelling an industry that will inevitably focus on price above sustainability, both in the form of human rights and environmental protection.
Clearly, action is required from a legislative point of view in this case, wages need to pulled in line with national minimum standards and worker rights needs to be addressed, but as long clothing retailers continue to compete primarily on price, I can’t help but feel we’ll continue to see headlines like this.
Last week I kicked off a series of articles aimed at helping you to prepare for your next negotiation. You can read the first entry around strategising and preparing yourself to negotiate here.
Today we are going to address the other side of the equation as we look to understand the motivations of the person/people you are negotiating with.
Clearly some of your interests will be shared, however it’s likely that some interests will be opposing. By putting some time into understanding the motivations and limitations of person you will be negotiating with, you will begin to understand not only the balance of power in the relationship, but also the potential levers you have to move the discussion in a direction you are happy with.
Before the negotiation: Put yourself in their shoes
What do they want from you? Where do their pressures come from? What are their concerns?
If you enter a negotiation understanding the concerns of your counterpart, you have the opportunity to address these fears outright, thus proactively removing some of the obstacles to achieving a positive outcome.
Similarly, understanding the constraints of the other side can help you to frame your own argument. If financial constraints have forced your boss to let go of some staff, perhaps negotiating for more training or some flexibility to work from home is a better course of action than pushing for more dollars at the risk of shutting the whole conversation down.
If you are able to understand what the other side is looking to achieve, not just in this negotiation, but also more broadly as a business, you can begin to engage with them on a collaborative level.
By addressing the ways that you can help them to achieve high level aspirational goals, you move your conversation away from one of ‘what I want vs. what you want’ to something far more strategic that is more likely to be mutually beneficial.
Understand the other side’s BATNA
Last week I introduced the concept of BATNA (basically, your next best option if the negotiation fails to reach a conclusion). While understanding your own BATNA will help you establish a walk away point and will clarify your thoughts as to what constitutes a good result from the discussion, it also pays to hypothesise what the other sides BATNA may be.
By understanding the BATNA of you opposition, you go a long way determining the balance of power in the relationship. Do they need to strike a deal with you? If so, you can push a little harder in the negotiation. If they have other strong options, you clearly have less leverage in the discussion.
During the negotiation: Listen – It’s the most important skill there is
Obviously, any insight you have generated on your opposition prior to the negotiation is based on little more than your own assumptions and best guesses. The only way to test these assumptions is to prompt the other side to speak and to listen carefully to what they have to say.
When you get into the negotiation, leave your preconceptions at the door and listen actively. The best business advice I have ever received came from my father, he said: “You’ve got two ears and one mouth and you should use them in that proportion.”
Remember, you have to address what people actually say, not what you think they are going to say.
Creativity is critical
When you are in a negotiation (and trying to reach a mutually beneficial outcome) its important to think beyond financial motivations. Be creative, keep an open mind and address the full range of interests that the other side may hold, perhaps there is something else you can offer up other than dollars that would satisfy both your needs and those of the other side.
Suggesting collaborative projects, better payment terms, and commitment towards initiatives outside of your previous remit show that your are committed to the relationship and that you are bringing something more to the negotiation than a stubborn point of view on an acceptable savings or salary figure.
The art of negotiation
I’ll leave you with the following quote from Sun Tzu’s Art of War which I think sums up the importance of not only preparing yourself to negotiate but also preparing yourself for your opposition.
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
Prompted by a post on Procurious by Kate Nicholl, I sat down and watched the BBC’s Panorama program that discussed some disturbing practices in the much-lauded supply chain of Apple, the worlds most valuable company. The BBC Panorama investigation originally aired Dec 2014, it has since been shown in Australia on ABC’s Four Corners.
The show highlighted that while Apple does a fantastic job of maintaining positive customer relationships, the same cannot be said for those working in the organisation’s supply chain.
Shortly after the original broadcast – Apple senior vice president of operations Jeff Williams sent an email to UK Apple employees stating that both he and CEO Tim Cook were: “deeply offended by the suggestion that Apple would break a promise to the workers in our supply chain or mislead our customers in any way”.
The program sent workers undercover to expose some troubling practices at a factory of a major Chinese supplier (Pegatron) and further down the company’s supply chain by investigating the dangerous, illegal and environmentally worrying tin trade that is occurring in the Bangka region of Indonesia.
The documentary has been criticised by some of being sensationalised and biased against Apple. However, its findings are truly concerning.
Some of the breaches of Apple’s supplier responsibility are listed below:
Concerning findings at Pegatron factory in China
Government issued personal identity card were illegally taken from workers.
Factory dormitory rooms were overcrowded. Despite making a commitment to only housing 8 staff members per dorm, the documentary shows examples of 12 people being crammed into these very dormitories.
Workers are working up to 16-hour shifts.
Workers are working up to 18 days consecutively.
Workers are so exhausted that they are falling asleep on the assembly line prompting significant health and safety concerns.
Workers are routinely working more than 70 hours a week. Apple’s standards state workers work no more than a 60-hour week.
Juveniles are working overtime and night shifts despite Apple’s commitment to the contrary.
Concerning findings in the company’s supply of tin included:
The detrimental impacts of tin mining sediment on local coral reefs.
Illegal tin operations are supplying the companies that Apple buys tin from.
These illegal suppliers are utilising child labour.
Safety conditions in the tin mines are incredibly dangerous.
Workers operate under the constant threat of landslides and death.
Clearly these are complex issues and it’s difficult to determine exactly were Apple’s responsibility begins and ends.
The Industry’s Whipping Boy
Apple and indeed many Apple fans have been quick to point out that the company is being held up as the whipping boy for an issue that permeates across the entire tech industry. Apple’s competitors are all likely culpable of the same indiscretions. I believe however there are legitimate reasons as to why Apple bears the brunt of these accusations.
The sheer size, value and market penetration of Apple means that our collective eyes focus on it. Our expectations of Apple are higher than those of their competition. Apple reported profits in excess of 39 billion dollars last year and the company is valued at half a trillion dollars. As the former US presidential candidate Ralph Nader points out in the documentary, there is no one better positioned to eliminate these sorts of practices than Apple.
Apple also spends a large percentage of its marketing budget positioning the company and its supply chain as sustainable. If the company wants to ride the brand benefits of being perceived as sustainable, surely it must expect some criticism when it is discovered that its commitments are not being followed through.
Keep the criticism constructive
It’s easy to over react to these sorts of programs and proclaim that you’ll never buy another Apple product. The fact of the matter is that as long as consumers want the price of their devices to remain low and as long as company’s like Apple are answerable to shareholders, they will continue to chase the lowest production costs which will unfortunately, more often than not, carry an environmental or human rights cost.
While I think it’s our obligation to continue to hold a spotlight to and criticise organisations like Apple, our criticism needs to remain constructive and cannot be done without mentioning the steps these companies are taking in their commitment to supply chain sustainability.
Last year Apple carried out 633 audits that covered over 1.6 million workers, a 40 per cent increase on the previous years figures. The company is open and transparent with its commitment to supply chain sustainability and what it expects from its suppliers. It also admits that while progress is being made, there is still a long way to go and that supply chain sustainability is something that the company needs to revisit constantly.
An issue of implementation
The most concerning elements of the documentary for me were the means that Pegatron had gone to appease Apple’s sustainability efforts without actually changing its operations.
The documentary shows that employees were ‘coached’ in how to fill out shift request forms (documents used in Apple’s supplier auditing process). Employees that did not respond by saying they were happy to work long shifts, night shifts or shifts where they must remaining standing, were told to fill in new forms, and failure to comply resulted in expulsion.
Another workaround developed for the benefit of Apple’s auditing process is the renaming of ‘overtime’ on employee pay checks to ‘bonuses’, thus hiding the amount of overtime employees have been forced to work.
To me, the Panorama documentary points to a fundamental breakdown in the implementation and execution of Apple’s sustainability project. While the commitments are in place on paper and efforts to implement them have been made, the company has not yet (and I stress the word ‘yet’) managed to instil these practices within its supply chain. If the evasive practices Pegatron has implemented to falsify Apple’s auditing documents are anything to go by, the road to implementing these measures will be a long and challenging one.
What are your thoughts on Apple’s supply chain? Where does its responsibility end? Is it fair that Apple bears the brunt for the whole tech industry? How does your organisation implement sustainability measures in its supply chain?
Like many before me, I started out in procurement without knowing much about what procurement actually was. One of my meetings in my first week as a graduate procurement analyst was with the head of direct spend. I entered his office with no idea of what direct spend was and left an hour later no more enlightened.
After the meeting I Googled indirect and direct spend and although I thought it seemed like an odd way to classify spend, proceeded to use the terms for the next decade of my career.
However, I recently found myself revisiting the oddities of these terms and questioning why we use them at all.
As business models and procurement operations continue to change and diversify, I feel that addressing spend as either direct or indirect is has become far less relevant.
In order to consider this more fully, it’s worth reviewing the following definitions from CIPS around direct and indirect materials.
Materials that are converted or processed to make the finished product. In category management in a manufacturing business, the most basic classification of categories is between direct and indirect materials. As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups. Indirect spend includes stationery, printing, office supplies, pest control, telephone costs etc., while direct materials will be whatever is used to create the finished product.
Goods which are purchased to support the operation and which are not converted into finished products or resold. Many manufacturing organisations separate direct materials, which are raw materials from ‘indirects’ such as cleaning, MRO supplies, travel, catering, printing, stationery etc. which are needed to support the operation. Many indirect acquisitions are low value and low risk and so lend themselves to simple acquisition systems and e-Commerce, such as online ordering through catalogues.
Two things jump out at me about these definitions and their relevance to modern procurement:
The first is that both definitions seem to be trapped in our industrial past – in that they only address firms that manufacture actual products. So, while I think these classifications would have held some relevance during the industrial revolution, I question whether they still stand up in today’s service driven economy?
Is direct more important?
The second concerning part of these definitions is the importance CIPS has attributed to each of these areas.
The CIPS definition suggests that “As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups”. It follows then, that direct procurement is the more demanding of the two groups.
I would argue that this is a huge generalisation.
We live in a service driven world
Look at banks, investment firms, lawyers, consultancies and tech organisations, these companies now make up a huge percentage of our economy but don’t produce a clearly defined, manufactured product. I would suggest that for these firms, indirect spend is infinitely more complex, demanding and risky than direct spend. Do they even have direct spend?
I guess what I am suggesting here is that while these classifications may have made sense in the past, they now seem like an antiquated way to classify spend.
Do we really think that a spend classification that groups pest control and advertising spend together has any real relevance in today’s procurement landscape?
Negotiation is a critical skill, not just in business, but also in our personal lives. Whether it’s readjusting contract terms with a supplier, discussing your next pay raise or organising where to go on your upcoming family holiday, the way we negotiate has a direct impact on where we’re headed in life.
However, entering into a negotiation situation can be a daunting thought. For many of us, the word negotiation is closely linked with feelings of awkwardness, compromise and conflict. We feel often feel ill equipped to manage the unknown, especially when negotiating with someone more senior, more powerful or more stubborn than ourselves.
With this in mind, I’d like to share with you a series of articles and propose some steps that will help you to prepare for your next negotiation.
Over the coming weeks, I’ll address what you can do to better understand the person you are negotiating with and why you should always consider external interests when you are preparing for a negotiation. But today’s topic centres on how to personally prepare and position yourself for a successful negotiation.
By failing to prepare, you are preparing to fail
The most successful negotiators have a clear understanding of what they want to achieve during a negotiation. If you can’t succinctly sum up what you want out of a negotiation, how can you possible hope to achieve it?
One strategy that can help to focus your efforts in this phase is to make a list of what you want, but also why you want it and why you think it’s reasonable that should you get it. Doing this in advance of your negotiation will help you to clarify your thoughts and provide you with answers to some of the tough questions that are likely to surface during the discussion.
Move beyond the dollars
When you are establishing what it is you want from the negotiation, it’s important to keep an open mind and think beyond mere dollar figures.
While monetary benefits are undoubtedly important, they needn’t be the sole determinant of success in a negotiation. Ask yourself what would constitute a good outcome for you. Could working from home or having the flexibility to spend more time with your family provide a similar level of happiness to a higher salary? If so, introduce these points into the discussion.
It’s important to keep your financial goals in mind and to push for them; however, good negotiators understand there are a number of ways to arrive at a good outcome.
Understand there may be more than one good outcome
As is often said, there is more than one way to skin a cat. When preparing to negotiate, try to think of a number of outcomes that you would deem to be acceptable. If you want, you can rank these outcomes in order of preference, but by understanding that the negotiation could have a number of good potential outcomes, you increase your chances of reaching an agreement.
If you enter into a supplier negotiation with a single viewpoint of what you consider to be an acceptable outcome (20 per cent price discount for example), you close yourself off to finding other innovative, potentially more lucrative solutions. Furthermore, any result other than your single viewpoint will feel like a failure. Looking at your interests (and those of your company) more holistically will naturally give you more flexibility and increase your chances of reaching an agreement that fully satisfies both parties.
Understand your walk away point
While negotiating is meant to be about reaching agreement, sometimes it is best not to. Not reaching an agreement allows you to explore other, potentially more lucrative options.
To this end, it’s important to take some time to understand your walk away position and to be prepared to put it into practice.
In their best selling book ‘Getting to Yes’ Roger Fisher and William Ury put some structure around this process and introduce the concept of BATNA (best alternative to a negotiated agreement). Your BATNA essentially outlines what will happen if you fail to reach an agreement during the negotiation.
In order to fully understand your BATNA, you need to understand what your next best options are. This requires a good understanding of the external market. What would another employer pay you? What price and service level would a competing supplier offer this product or service for?
By understanding your BATNA and walk away position, you enable yourself to make an informed decision about what the other party is offering. This process goes a long way in determining the balance of power in the negotiation.
What other tips have you got for preparing for a negotiation? Share them below and stay tuned for next week, when we delve into the steps you can take to better understand the person you are negotiating with.
Would you a hire generalist over someone who specialises?
While flying last week, I listened to a HBR podcast that discussed Google’s approach to talent selection and management. One of the first topics of discussion was Google’s preference for hiring ‘generalists’ over ‘specialists’.
Google’s partiality for generalists stems from the fast changing nature of its business. The company sits at the forefront of innovation, both within its traditional realm of Internet search and but also with it’s seemingly outrageous side projects like its efforts to produce self driving cars.
The podcast suggests that Google tends to hire generalists because they believe these ‘learning animals’ are more flexible and bring an open mind to problem solving and this suits Google. I guess when you are doing something that’s never been done before past experience is a little less relevant.
The podcast also states that specialists tend to bring a certain bias to problem solving. This sentiment is perhaps summed up by this quote from Abraham Maslow (he of ‘ the hierarchy of needs’ fame):
“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”
The one thing I took away from this podcast was that while hiring generalists may work for Google, I’m not sure this logic applies across the board.
The age of the procurement specialist
In procurement for example, I believe there is a strong case for hiring specialists. As the procurement landscape continues to become more complex geographically, technologically and legally, I believe the role of sourcing specialists with niche skill sets will increase in prominence.
IT is a great example of a category that has got infinitely more complex to understand, let alone manage, over the last decade (ironically, thanks in part to the generalists at Google). Firms have become more reliant on their IT operations as a source of competitive advantage – therefore doesn’t it follow that someone with an intricate knowledge of this area becomes more valuable?
Clearly, the generalist vs. specialist argument is an oversimplification of a complex matter. Successful teams undoubtedly need a balance of both. But how can procurement teams ensure they get the balance right?
What’s basketball got to do with it?
Studies by Dr Long Wang of City University of Hong Kong have addressed the issue of balancing generalists and specialists both in the workplace and on the basketball court.
Wang suggests that we as managers (or basketball coaches) have a troubling tendency to compare generalists to specialists in isolation. This tendency, he argues, is counter productive.
Wang suggests we should be analysing both the worth of employees and basketball players in the context of a team. While a basketball all-rounder may out perform a specialist three point shooter in a one-on-one match up, this is not a fair indication of their effectiveness as part of a team. Moreover basketball, like business, is about achieving team results not individual accolades.
Have you got the guts to pick a three-point shooter?
Wang postulates that our bias towards generalists has a lot to do with our aversion to risk. Generalists are more defendable to managers than specialists are.
“If I was the general manager of a basketball team” Wang said, “it would be easy for me to justify hiring one great athlete after the next because you can [justify] their individual statistics really well,”
While comparing a three-point specialist to a more rounded basketball star may appear unfair at first glance, (three-point shooters tend to be less athletic, post fewer recordable stats and are generally less captivating) their impact on the team’s overall performance is huge. Ultimately it’s the team performance we are interested in anyway.
“Do you want five superior athletes, or one clunky, non jumping, great-shooting three-point shooter and four great athletes? In fact, the five great ones, on average, might each be better than this guy, but as a team you do better when you have a role player who can do something special.” Said Wang.
There is no hard and fast rule to follow when it comes to selecting generalists over specialists or vice versa. But, I think it’s important that we remember to evaluate candidates based on how they perform as part of a larger team and not just what they are capable of in isolation.
When CEOs and CFOs look at procurement metrics, one figure stands out: savings.
However, when we as procurement people look internally and attempt to analyse the performance and effectiveness of our own function – ‘spend under management’ is normally the metric we turn to and I’m not convinced this is a smart move.
I’m not going to argue that a procurement team that actively manages a large part of its spend is not positioning itself for success, that logic is sound. But, I do feel the spend under management metric (in its current interpretation) is a little misleading.
We’ve all read the procurement research papers that tell us what ‘top performing procurement teams’ do in relation to talent, supplier management, technology etc. More often than not, the determinant for what constitutes a top performing procurement team is tied to the amount of spend that organisation has under management.
Generally speaking, the performance bands look something like this:
Top performers – 75-85 per cent of spend under management
Average performers – 55-65 per cent of spend under management
Poor performers – 35 per cent or less of spend under management
When is a rose not a rose?
The issue I have with this metric is its definition, or rather, its lack of definition.
Despite the fact that the term is used extensively across our profession, the CIPS glossary doesn’t actually contain a definition for spend under management. This may go someway to explaining the variation we see when this metric is reported.
When I broke down the term for myself, the first part (spend) made sense. It’s the second part of the definition (under management) that is open to debate, interpretation and conjecture. What does ‘under management’ actually mean?
To help explain the vagueness of this term, lets look at what could potentially constitute ‘spend under management’:
Spend that passes through a procurement system (source to pay)
Spend that is covered under a contract
Spend that falls under a sourcing plan
Spend that is strategically and actively reviewed
Spend that is actively reviewed and managed internally by procurement to ensure that employees are utilising the contracted rates, terms SLAs and benefits.
I’m going to show you how great I am
The lack of a formal definition for the term has led to a scenario where procurement teams themselves are determining how much spend they have under management.
Essentially, the metric we are using to define the effectiveness or maturity of a procurement team is being generated, through the interpretation of an ill-defined term, by the very procurement team being analysed.
I’m not here to throw stones at how procurement teams use the term, but until we as a function can come up with a less subjective definition of what constitutes spend under management. Don’t you think it seems redundant to hold this metric up as means to compare the maturity or performance of different procurement teams?
Nevertheless, I do believe that spend under management, regardless of how your organisation choses to define it, can be used as an effective tool to track procurement performance and progress within the four walls of your organisation. If, and only if, it is presented to senior management along with your procurement team’s definition of the term. Something along the lines of:
“This is how we define spend under management… As a procurement team we’ve increased the amount of spend we are managing. Last year we had 60 per cent of our spend under management. This year we have 75 per cent.”
What do you think? How does your firm define spend under management? Should we continue to use spend under management (in its current interpretation) to compare procurement teams? Is it even possible to come up with a standard industry-wide definition?
The Financial Times newspaper reports that a former executive of the Brazilian state owned oil company Petrobras has accused British engineering company Rolls-Royce of bribery.
The newspaper claims (with supporting court documents) that Rolls-Royce paid bribes in excess of $200,000 USD to the former Petrobras employee in order to secure lucrative engineering contracts for gas turbines used on the company’s oil rigs. The contract had an alleged value of more than $100m USD.
Rolls-Royce has released the following statement via email:
“We have not received details of the allegations made in recent press reports, nor have we been approached by the authorities in Brazil”.
The allegation levelled at Rolls-Royce falls under a larger inquiry into Petrobras. The company is currently engulfed in controversy pertaining to wide spread corruption throughout its procurement practices. It has been alleged that Petrobras has received billions of dollars in bribes from suppliers eager to secure contracts.
Rolls-Royce is also currently under investigation by Britain’s Serious Fraud Office. The investigation that began in 2013 centres on corruption and bribery claims present within the company’s operations in China and Indonesia. Such claims included the ‘gifting’ of 20 million dollars and a blue Rolls-Royce car to Tommy Suharto (son of Indonesia’s former president, General Suharto) – in a bid to persuade the national airline to use Rolls-Royce engines for its fleet.