All posts by Mike Robertson

The Business of Procurement’s Cultural Evolution

The business could benefit from seeing procurement’s value in a new light. The challenge is getting people to accept the change.

time for business change

In my previous article, I discussed the struggles procurement faces with the perception of its value. One of procurement’s key issues is that, in most cases, the cultural focus is on cost savings.

This driver is linked to the four key stakeholder groups that procurement must answer to – the CEO; business leaders; the supply chain; and the CPO.

Because culture is handed down from the CEO, the culture of savings flows down through the business and the supply chain. This can lead to business leaders and the supply chain attempting to bypass procurement. This is where the perception of value of procurement is critical.

However, all is not lost! With the stakeholder requirements in mind, we can propose an alternative cultural model that will drive benefit for all four groups, plus procurement itself.

Procurement’s Future Culture

The key change in the future culture, from the culture we have now, is that it turns the key drivers on their heads.

  • In the new structure the number one driver for procurement is the supply chain.

Procurement focuses on collaboration, innovation and becoming a customer of choiceThe relationship is built upon mutual benefit and trust. It involves procurement becoming a business partner and promoting the suppliers capabilities and successes.

  • The number two driver is the business leaders.

Procurement brings new ideas and opportunities into the business from the supply chain, resulting in procurement being recognised as a trusted advisor to the business. The business supports procurement’s focus on mutual success, collaboration and becoming a Customer of Choice.

  • The third driver is the CPO

The business leaders complement the CPO on the great value their team brings into other business areas. The business leaders desire procurement’s involvement in their areas of business and identify them as trusted advisors.

  • The final driver is the CEO

The CEO has heard about the added value procurement delivers into the business and the success it is achieving. The CEO’s main focus for procurement is to retain the value they are bringing into the business from the supply chain.

The Procurement department is still a cost centre, but cost takes second priority to the value being generated for the business.

By re-aligning priorities, we have created a culture that meets the needs, and addresses, all four groups. The new culture also takes procurement away from the perception of being price focused, to becoming a value add for its stakeholders and customers.

It is what, for many, has become the nirvana of what they desire procurement to become.

Where’s the Evidence?

The next question you may have is, how do we know this is the right direction?

Some of you may already know of Johanne Rossi who won CPO of the year 2016. In an article posted on Procurious website in June, Johanne talks about what she did to make her Procurement department a major success within the business.

Here are a few extracts from the article for you to think about:

  • “re-structuring…teams in new ways to better partner with stakeholders and supply partners” – we are seeing the first evidence of partnering with the business
  • “A procurement innovation manager has been hired to achieve benefits…such as finding new, mutual value with supply partners through innovation and efficiencies.” – the key word is mutual
  • “Building internal and external relationships, and developing stronger business and commercial skills.” – a focus on developing procurement’s commercial skills
  • “The entire focus for us is to become the customer of choice for our suppliers” – this is the killer quote. It underpins a model of building trust, collaboration and promoting joint success.

Johanne’s full article on Procurious can be found here.

Re-aligning Attitudes to Change

We have outlined a culture where many procurement individuals find themselves trapped today and offered an explanation why it occurs. We have gone on to provide an alternative model for driving culture and value, one that could bring significant benefits to both procurement and the organisation.

To undertake this re-alignment, it may require attitudes to change and potentially re-building supplier relationships. For some people this may be a step too far.

An alternative path is for procurement to remain as it is, but then don’t be surprised if your department becomes fully automated and you’re out of a job. You were warned!

To undertake this journey requires a re-assessment of procurement principles and drivers, with a greater focus on the desired outcomes from the engagement with all stakeholders.

Procurement has a magnificent opportunity to become a critical business function for an organisations success within 21st century markets. The question is, do you want to be a part of it?

“It is never too late to change. The issue is deciding if you want to.”

POD Procurement is a consultancy and advisory for Procurement Transformation. For more information, and to read more about the POD Model, visit our website.

The Evolution of Procurement Culture

Procurement often struggles with the perception of its value. But could the issue be traced back to the culture expected by its stakeholders?

evolution of culture

What is Procurement’s business value? Is it doing a great job and does the business agree? If the perception of procurement is less than we desire, it is possible to change it?

These are the tough questions we explore within this article. Warning…this article may offend some people! Yet, if we are to make progress, it’s time to be honest.

Procurement’s Perceived Value 

If you ask a procurement person if they are doing a great job, most will agree. They might say they are working to tight deadlines, complying to complex processes with limited resources and information, they do the best they can. Generally, it’s a fair assessment.

However if we ask the business the same question the response can be brutal, “No, they are not.”

The feeling is that procurement is driven by price, that they are reactive, and that procurement never brings new ideas into the business. Frequently procurement are used out of necessity, but their involvement is not desired.

This revelation can be upsetting to many within Procurement, especially when their is a clear desire to be considered as a trusted advisor, pro-active and a business capability that adds value.

If a negative perception of procurement is something you face within your organisation then we have some good news! It isn’t your fault, and it is possible to change it. 

Stakeholders & Customers

“Why is there such a disconnect?”

To help us identify what might be going wrong with the perception of procurement, we need to identify the main business areas involved.

There are four main groups that are important customers and/or stakeholders to procurement:

1. Head of the Business/CEO/CFO

This individual is responsible for budget approval, business strategy and might even decide if there is a procurement department. Their ability to decide Procurement’s future makes them a critical stakeholder for the function.

2. Business leaders/Budget Holders

This group are responsible for bringing requirements to procurement, and procurement needs their business. Losing the support of the business leaders could see a drive to outsource/automate the procurement department.

3. Supply Chain

The suppliers provide the solutions to the business leaders requirements. No suppliers means no business solutions.

4. Head of Procurement/CPO

This individual is responsible for employment, pay rises and promotions within the procurement team. As this person holds the career of the Procurement Practitioner in their hands, they are a key stakeholder. 

Procurement’s Culture Today

If we accept procurement’s culture largely remains focused on price, then we need to know why. Even will all the evolution in procurement, it’s clear that this is still prevalent. Here’s why:

  • The number 1 driver for the current procurement culture is the CEO (or CFO or equivalent)

Traditionally, to this individual procurement is principally a ‘cost centre’. The greatest value procurement offers them is keeping their costs to a minimum.

  • The next driver for procurement is the CPO

The CPO wants to ensure they meet the needs of the CEO/CFO. This is critical in ensuring they retain the support from the senior stakeholders.

Therefore maximising cost reductions are critical, realised through contract savings. This culture is amplified further by attaching procurement salary bonuses for achieving contract savings.

  • The third driver for procurement culture is business leaders

The culture is already firmly established on reducing costs/price to achieve a procurement agenda. The business leaders can struggle to identify any real business value in procurement engagements, resulting in a strained relationship.

  • The final group driving procurement culture is the Supply Chain

The culture of the engagement is based on a drive to reduce supplier margins. With no real focus on collaboration, promoting success, or becoming a customer of choice, it is a one way relationship focused on procurement success. This results in an engagement with little or no trust.

To recap, because the culture is coming down from the CEO/CFO it creates a culture focused on savings, which continues to flow down into the business and the supply chain and can result in the business leaders and the supply chain trying to by-pass procurement.

Culture From the Top

But all is not lost. In the second part of this article, we’ll propose an alternative cultural model that will drive benefit for all four stakeholder groups, plus procurement.

This will also help optimise procurement practitioners’ individual value, an aspect critical for attracting the best talent and talent retention.

“Perceived value can be in response to how you engage, which is a result of your culture, and is influenced by your drivers.”

POD Procurement is a consultancy and advisory for Procurement Transformation. For more information, and to read more about the POD Model, visit our website.

Supplier Collaboration? You Must be Joking

There are numerous articles talking about the value that remains untapped within the supply chain, if only buyer and supplier could collaborate. But what does it mean to collaborate?

Collaboration is key

If you were to look up the definition of Collaboration, it is either:

  1. To work together
  2. To co-operate treasonably with the enemy

And for many procurement professionals, number two may still be closer to the mark than number one!

Assuming the correct definition in this case is ‘to work together’, what could collaboration offer the buyer? What is the untapped value in the relationship?

Supplier Innovation

Following the award of the contract, between order placement and delivery, there is time. What if the supplier could apply their knowledge and experience during this time to see if they could deliver the contract for less?

This is called ‘Supplier Innovation’ and involves the supplier applying their expertise and knowledge to the contract in the post-contract award phase to save the buyer money.

The real question is, if the supplier could deliver the contract for less, would they tell the buyer? Unfortunately, in most cases, the answer is no.

If Supplier Innovation occurs between order placement and contract delivery, theoretically it could be applied to all contracts. Therefore, in order to access the untapped benefits of supplier innovation, the buyer needs to ensure the correct incentives are in place before awarding the contract. But how can you do this?

Gain Share in Contracts

The answer is relatively simple. In order to collaborate, both parties need to understand how they benefit – answering the “what’s it in for me?” question. Unless both parties see value in collaboration, it is likely to remain an ‘if only’ situation.

For suppliers to collaborate with buyers, they need to see financial benefit. One way traditionally used to incentivise suppliers is a Gain Share. A gain share is a risk/reward commercial model used to incentivise suppliers to achieve specified objective. If the supplier achieves this objective, they receive more revenue.

Gain shares have some interesting characteristics which include:

  • The objective is pre-defined and negotiated prior to contract award – This is counterproductive to encouraging Supplier Innovation, as the supplier does not know if innovation is possible until they are in the post-contract award phase.
  • Gain shares can be complex and time consuming to negotiate and therefore used selectively – This is also counterproductive to encouraging Supplier Innovation, as the buyer needs this capability in all its contracts.
  • Gain shares are a risk/reward model – Again this is counterproductive, as, by definition, you cannot predict if innovation will occur and therefore it has to be achieved without increasing the risk of the supplier.

It seems clear that there is untapped value within the supply chain, if the buyer and supplier collaborate. Yet, how this is to be achieved while using current commercial models remains a mystery to many.

If we could have supplier Innovation available within all our contracts, encouraging and rewarding suppliers when they innovate without risk, costs or effort to either party, have we finally found a way to access the untapped potential that resides within the supply chain?

Well, there may be a new option that both buyers and suppliers can use – The POD Model. The model is a scalable (can go into every contract) model that encourages suppliers to innovate (without increasing the supplier risks) within the contract. If innovation occurs (without making it a supplier obligation), it generates additional savings for the buyer and increased profits for the supplier (addressing the “what’s in it for me?” question). And best of all, it’s free!

So no, we’re not joking when we talk about collaboration. Can you afford not to?

About the Author POD Procurement: POD Procurement created The POD Model and provides consulting and training on its implementation. The POD Model is free to use and can be found on the CIPS knowledge website. For additional information please contact info@podprocurement.com

Do Fixed Price Contracts Endorse Embezzlement?

For many years Buyers have used ‘fixed price’ contracts – a contract that stipulates the final price regardless of the outcome.

Embezzlement

There are a couple of common reasons why buyers use them. The first is to move the risk of the contract going over budget to the supplier. The second is to encourage the supplier to act appropriately and encourage them to complete the work under budget if possible.

While the buyer might think this represents smart procurement, this might not be the reality.

Unwelcome Contingencies

Suppliers are very familiar with fixed price contracts and recognise the risk being moved onto them. Their response is to modify their submitted price to include a contingency fund (price + contingency = submitted price).

In moving to a fixed price commercial model, the buyer is making a statement that they believe the contract has a high probability of going over the initial estimates and hence want to move the risk of this occurring onto the supplier. It is the act of pre-empting risk which pushes the supplier to include a contingency in the price.

Horror stories abound about suppliers under-estimating requirements and ending up absorbing much higher costs than expected when delivering the contract. While these stories are used as the justification for fixed price contracts, in reality this occurs less often than most believe.

If it was a common occurrence, suppliers would either go out of business due to additional losses, or refuse to accept a fixed price contract. The reality is that to deliver the requirement, the supplier generally gets their initial estimates correct or consumes a small percent of their contingency fund.

Here’s the issue…

From the suppliers’ perspective, a fixed price contract is a risk/reward model, and regardless if they deliver the contract for the stated cost or less, they invoice for the full amount. Here is where we hit an issue – assuming that in delivering the requirement the supplier has not consumed all of their contingency fund how does the supplier invoice for the full amount?

There are a couple of options here.

  1. Invoice based on Stated Costs: The buyer and supplier agree to invoice based on stated costs i.e. phase 1 will be invoiced for X, phase 2 for Y, etc. This will enable the supplier to invoice for the agreed amount. The issue for the buyer is lack of detail behind the invoice and being unable to quantify what has been purchased if challenge
  2. Itemised Invoices: The supplier provides itemised invoices, enabling the buyer to assure the business of what has been procured. The fixed price was justified based on the contract requiring a certain number of assets to deliver it (an asset could be Personnel, Resources, Time or Goods).

Yet in delivering the contract, the supplier has not utilised their full contingency fund and therefore not required all the assets predicted. This results in the supplier submitting invoices that include assets that were not actually required by the buyer, but that the supplier has to include in order to ensure numbers add up to the full amount. This could be interpreted as an act of embezzlement.

Wait…what?

Embezzlement is an act of dishonestly withholding assets for the purpose of conversion (theft) of such assets, by one or more persons to whom the assets were entrusted”

Either the buyer naively expects that the contract requires the supplier to utilise their full contingency fund, or is endorsing the ’embezzlement’ by paying for assets they know have never been delivered!

Assuming the buyer knows a contingency has been added, when they agree the fixed price, not only were they agreeing to the predicted costs but agreeing to pay the contingency fund too. In effect they have guaranteed to pay more than is required – a great way to reduce procurement savings.

Any Alternatives?

We are not actually stating fixed price contracts are embezzlement but it makes one wonder. Fixed price contracts introduce supplier risk, more often than not to the detriment of the buyer. If buyers could encourage suppliers to collaborate and deliver the contract under budget for mutual financial benefit, it might be a better solution.

A nice theory, but up until now, a fixed price contract has really been the only viable option. However, there is a new option for both parties to use – The POD Model for Supplier Innovation. The model enables a buyer to revert back to a standard price based contract, the supplier is only paid for what it takes to deliver the contract and the supplier is incentivised to deliver the contract for less to achieve higher profits. This approach results in higher procurement savings, the right supplier attitude and clarity on invoicing.

So, it is maybe now time to review the use of Fixed Price Contracts?

POD Procurement created The POD Model and provides consulting and training on its implementation. The POD Model is free to use and can be found on the CIPS knowledge website. For additional information please contact info@podprocurement.com