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Procurement: The Startup’s New Best Friend?

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

4 Ways Procurement Can Work With Start-Ups and SMEs

Size isn’t everything when choosing suppliers.

There’s a poignant scene in The Lord of the Rings in which the Elven Queen Galadriel turns to Frodo Baggins, a frightened young hobbit, and gently reminds him that ‘even the smallest person can change the course of the future’. 

Against all odds, and to the dismay of many powerful leaders in Middle-earth, Frodo is entrusted with the monumental task of destroying the One Ring within the fires of Mount Doom. His relentless determination, unorthodox methods and the faith of his closest friends all contribute to his ultimate success. 

What can procurement take away from this? Most importantly, when it comes to selecting suppliers, size isn’t everything – something any one of the 30.2 million small businesses operating in the United States could tell you. 

Traditionally, big works with big. But companies today are recognizing that they are selling themselves short by restricting their supply base to large organisations. 

Benefits of working with SMEs and start-ups include: 

  • Small businesses are more agile and innovative because they are less confined by rigid or bureaucratic processes.
  • Improved sustainability and added social value, which benefits the local economy. This is because SMEs are likely to have a good understanding of the community in which they operate.
  • Better value for money as a result of lower admin costs and increased flexibility.
  • Capacity to deliver highly specialised solutions.
  • Closer buyer-supplier relationships.
  • Increased efficiency in terms of product cycles and the provision of services.
  • Improved supplier diversity: 45% of US-based SMEs are minority-owned businesses.

Despite the many advantages, some procurement leaders remain wary of partnering with smaller businesses due to increased risks. Others simply struggle to effectively build and nurture these partnerships.

Here are my 4 tips for procurement to build successful relationships with SMEs and start-ups. 

1. Build close relationships with your suppliers

One of the many benefits of working with smaller vendors is that it’s easier to build meaningful, lasting relationships – often directly with the CEO. These drive innovation, reduce cost and mitigate risk. 

Procurement professionals should take advantage of this through regular communication and collaboration with suppliers, particularly in the pursuit of innovation.

Negotiations, contracting and pricing are a necessary (and important) part of any buyer-supplier relationship. But meeting your suppliers in person to seek innovations will drive value for your organisation. 

In reality, you might be surprised at how much additional value a supplier can contribute when you abandon standard approaches to SRM and commit to listening and learning.

2. Pay your suppliers on time 

According to a recent study, 11% of all invoices sent by SMEs are not paid on time, which comes at a cost of over $1 trillion each year. On top of this, the research found that 7.5% of all SME invoices are written off as bad debt. 

SMEs are dependent on good cash flow. Many fail as a direct result of clients delaying payments. So paying your suppliers on time should be an absolute priority for procurement professionals.  

Similarly, procurement should be cautious about driving harsh payment and contractual terms with small businesses that may be unequipped to negotiate with large corporations. Remember SMEs are likely to deliver long-term value in other ways. 

3. Be flexible 

In order to prioritise innovation and other benefits associated with SME partnerships, procurement teams must be willing to adapt their processes to be more accommodating. 

Many corporations are accustomed to only dealing with other big companies. This leads to the assumption that only large suppliers are capable of meeting demands and managing risk.

In reality, as long as suppliers are financially secure and can deliver your requirements, your flexibility in accommodating them is the more important factor. 

Procurement teams can do this by:

  • reducing contract complexity 
  • limiting turnover thresholds and removing high insurance and health and safety requirements
  • sharing risk appropriately between buyer and supplier
  • keeping KPIs simple, concise and supportive. 

4. Mitigate potential risks fairly 

There’s no question that there are risks associated with working alongside SMEs and start-ups. But with careful consideration and forward planning, these can be mitigated. And without negative impacting prospective suppliers to a point where they are compelled to walk away.

For example, an SME might present a higher financial risk than a big supplier. These concerns can be alleviated by requiring financial due diligence and detailed discussions surrounding the company’s finances to ensure complete transparency. 

Similarly, it’s worth asking for an overview of the supplier’s recent and ongoing projects, including a first right of refusal to buy the company should it go bankrupt. Commit to regular meetings and use incentives instead of penalties. 

So, the next time you’re approached by an SME or start-up, don’t reject them on the assumption that they will be too small to meet the needs of your organisation.

Just like Frodo Baggins and the Fellowship of the Ring, an SME just might turn out to be the most valuable partnership you ever create. 

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The Procurement Tipping Point

At what point should a growing business bite the bullet and professionalise procurement? New research from Wax Digital has found that the right time is surprisingly early in a businesses’ growth, but it’s usually done on the back foot. 

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As professionals in the sector we tend to think that procurement is the sole domain of large organisations spending millions of pounds on thousands of suppliers. However, new research has found that many smaller and more formative businesses also turn to procurement.

We recently surveyed 260 UK business and procurement experts and asked them at what point organisations needed to professionalise procurement to get a firmer grip on spend, suppliers, sourcing and so on. We were surprised by how many thought the ‘tipping point’ for procurement was relatively early on in a business’ growth. The results were as follows:

  • 75% said procurement was required once a company reaches £50M turnover
  • 77% claimed to need procurement by the time a business has 100 supplier contracts
  • 72% said once 500 invoices per month are being processed, procurement was essential.

Clearly, it seems that many smaller organisations are adopting procurement, so why is this? When asked why they introduced procurement, 68% said that it was due to rising costs, while 45% said that it was due to inefficient and labour intensive processes. Being a successful, up-and-coming business means experiencing rapid growth and significant change in these areas – more so than a larger, more established business.

For example, an organisation may be undergoing a merger or be highly acquisitive, bringing in more complex supplier portfolios or increasing spend overnight. These types of events can force a business to rethink processes like procurement. The very foundations of the organisation could adjust dramatically, and existing resources may simply not be adequate enough to support it.

Quick, someone build us a procurement function

Another interesting discovery in our research was that procurement is often introduced ‘on the back foot’ as opposed to being part of a pre-planned vision. We found that procurement is implemented as a reaction to a negative situation 48% of the time, compared to 31% of the time when it’s rolled out as a proactive and positive step forward. So few businesses planning ahead with procurement suggests that it’s (wrongly) an afterthought for many. Many businesses are ‘reactively’ using procurement, suggesting that they are already experiencing issues such as a lack of spend control or inefficient processes. But pre-planning with procurement could help businesses evolve more efficiently to try and reduce these problems.

That said, rolling out procurement isn’t always plain sailing, and smaller businesses with limited resources may particularly struggle to establish this new function successfully. Gaining senior management buy-in is the most common barrier to adopting formal purchasing processes, cited by 35%. Managing cultural change and a lack of internal knowledge followed, scoring 27% and 19% respectively. Given that they work for a smaller business – perhaps with a less rigid structure – the need for a procurement function might simply not occur to some SME employees, and it may take some time to win the support of colleagues. Those in the business being hindered by the lack of procurement shouldn’t be afraid to make a case for it to senior management.

Make sure the time is right

No two businesses are the same and each will feel the need for procurement at different stages. It’s not right to see procurement as something that should only be introduced when you reach a specific size or stage in the business cycle. Instead, consider when the businesses is feeling a strain that formalised procurement could help with.

It’s time for the procurement community to help strip its perception as a function for the larger business. This way more businesses can realise its effects.

Contributed by Paul Ellis, Managing Director at Wax Digital.

Financial Troubles Spell Tough Times for Small Businesses

The start of 2017 looks set to be a tough period for small businesses. With increasing number of businesses being wound up, it appears the high street’s suffering is far from over.

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The past twelve months have been hard for small businesses, and it doesn’t look as though 2017 will offer much respite. Changing consumer trends, and economic and political factors, are already taking their toll on the UK’s High Street.

Over 760 businesses ceased trading in December 2016, with a further 1093 small businesses scheduled to be wound up this month. And, according to a survey of the latest insolvency notices published in The Gazette, some industries are being harder hit than others.

Small Business Suffering

Between the companies wound up in December and January, as well as those which failed in the third quarter of 2016, it brings the total number up to nearly 5,500 failed businesses.

With the official figures for the final quarter of 2016 due for publication in January 2017, cause and effect is yet to be confirmed. But it is certain that wherever a business is unable to weather restrictions in cash flow, insolvency looms.

The research was carried out on behalf of London insolvency practitioners Hudson Weir. It reveals that some industries are being hit harder when it comes to failing businesses. The study revealed that 14.5 per cent of these companies were operating in the retail and food and drink sectors.

However, it’s in the construction industry where the impact is felt most acutely. According to data collected during the second quarter of 2016, 2450 construction companies ceased trading. Next most affected was the wholesale, retail and repair of vehicles sector, with 2065 company insolvencies.

And it’s not only small businesses suffering from lower trading towards the end of 2016. Retail giant, Next, has issued a warning over trading for 2017. The company saw a drop of 3.5 per cent in the run up to Christmas, and anticipates a similarly gloomy picture for 2017.

Brexit or Cash Flow to Blame

The reasons for company insolvency can be complex, ranging from unrealistic planning through fraud and unforeseen loss of market share. But the root cause of is it frequently simple: inadequate cash flow.

Financial trouble tends to strike early in the business life cycle. Only 41.4 per cent of the UK businesses started in 2010 survived to their fifth birthday.

But how much of an impact has the Brexit vote and uncertainty had on insolvencies? Although the UK economy seems to be surviving the immediate post-referendum period, vulnerable business sectors – like construction – have experienced contraction.

Restaurants, cafes and other food outlets are heavily represented in the latest insolvency reports, too, a trend which could reflect the recent well-publicised rise in food prices. Even large companies such as catering giant Compass have been affected by the consequences of a weaker pound.

Hasib Howlader, a chartered accountant at Hudson Weir Ltd, commented on the survey results.

“Brexit is unlikely to bring good news for small businesses, and it seems now it’s just a question of how bad it’s going to be. With more than 40 per cent of small businesses struggling to survive beyond five years even in a pre-Brexit climate, it’s now more important than ever for them to be looking for warning signs that their business may be unhealthy.

“If cash flow is a problem, and you can no longer pay your bills as they fall due, the earlier you speak to an insolvency practitioner the better.”

Mitigating the Effects

Even though businesses are at the mercy of circumstance, it’s possible to mitigate the effect of uncertain situations like Brexit. Hudson Weir recommends that business owners:

  • Get to know the normal patterns in cash flow data

When a business keeps good records of its cash flow over a period of years, it’s possible to identify seasonal and other trends, and plan for them.

  • Look to the future

The logical next step after record-keeping is making a cash flow forecast. A clear-eyed view of incomings and outgoings six months to a year in advance helps manage business expectations.

  • Keep up to date with invoicing and payments

Each invoice should be accompanied by clear payment terms, and it’s well worth enforcing these. It’s also worth getting to know customer payment habits, since any unusual delays can be early indicators of financial trouble.

  • Make long payment terms the exception, not the rule

30- and 60-day terms make cash flow management more complicated.

  • Focus on managing cash flow

This is something even highly profitable business should do, as out-of-control cash flow undermines profitability and jeopardises future prospects.

How Procurement Can Support SMEs in Tendering

SMEs can provide formidable USPs to procurement. But procurement first needs to take steps to support them in the tender process.

99 per cent of all businesses within the UK are small and medium enterprises (SMEs) – those companies which are made up of 250 employees or less.

At the end of 2015, the total number of companies this size in the UK stood at 5.4 million.

Recently, within public sector procurement, there has been a noticeable increase in the number of contracts awarded to SMEs. Given that SMEs have long since made up the majority figure of all businesses within the UK, it is interesting to see that only now are they being brought to the forefront of the bid and tender process.

Wave of Change

A recent study has shown that nearly three quarters of public sector procurement contracts have been awarded to smaller organisations. This is in contrast to a few years ago, where just over half of contracts were awarded to SMEs.

Historically, larger businesses have been able to gain competitive advantage on SMEs in the contract bidding wars. They have been able to provide extensive financial data, as well as time and money, to work through the complex tender processes.

However, the wave of change has arrived. Public sector organisations are helping make that tender process a lot easier in a bid to support local businesses. With less red tape, SMEs are able to provide an enhanced USP to procurement. This includes access to local products/services, innovation, ethical trading and overall a more competitive offering.

Simplifying the Procurement Process

Leading the way, some organisations have already begun by standardising tender documentation. They require less financial information about the company, and are setting up electronic portals to help make the process as efficient as possible.

All of this is in aid of simplifying that bid process for SMEs to encourage them to apply and succeed in winning contracts.

For procurement professionals, this simplification of the tender process not only supports local SMEs, but also helps to cut out inefficiencies in day-to-day procurement jobs.

When it comes to reviewing bids now, procure have less financial data to wade through, and a more comprehensive tender document to look over. Plus, taking advantage of technology is also helping save time and money.

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