Corporate functions that support relationships with suppliers and service providers – including Project Management Offices, Vendor Management Offices, Procurement teams, and more – have traditionally been built around their particular external interface. Part of their reason for being is the concentration of knowledge and experience in the hands of a team of trained professionals who get better and better at dealing with third parties on behalf of the businesses they support. They leverage spend from across the company, negotiate and manage contracts to capture value and mitigate risk, monitor key performance indicators and enforce service level agreements to manage performance, and develop and implement governance models to manage external relationships.
These external-facing activities are critical; but all available evidence and experience shows that they are unlikely to be effective without stakeholder buy-in and engagement. Consider a few examples:
Twenty-five plus years into the evolution of outsourcing models, one of the critical lessons we have all learned is that these deals typically fail because of poor change management. Whether the deal is a simple “lift and shift” of the outsourced function, or a more complex transformation and modernization, unless the users of the function are prepared to make changes in how they consume the services and interact with providers and their processes and technology, the expected benefits fail to materialize and the provider fails to make a profit. Stakeholder engagement is an indispensable ingredient of change management.
Beyond outsourcing deals, many supplier contracts fail to achieve their intended value because of poor implementation. Our research confirms what many recognize intuitively: a significant part (45% was the average customer-side response) of the intended value in supplier contracts is never achieved. Innovation does not materialize; scope changes add significant costs; off-contract buying undermines savings; projects get delayed; and quality suffers. (By the way, suppliers experience similar value-leakage with volumes that fail to materialize, changes in requirements that add unrecoverable costs, customers that fail to provide expected resources, and projects that get delayed, see
http://bit.ly/1mOoNUT.) As should be evident from the litany of problems, most show up during implementation of the agreement, because stakeholders outside the negotiation or supplier management function fail to implement the deal as expected.
Procurement as a function often fails to fulfil its potential strategic value because stakeholders engage the function late in the process and relegate sourcing and category specialists to tactical contracting activities. Without understanding the priorities of the business there is much less Procurement can do to add real strategic value; coming in late in the process leaves highly capable professionals with little to do but try to negotiate some discounts or impose some standard contractual provisions, which are seen as adding limited value and creating a fair amount of stress, delay, and damaged relationships with suppliers. Repeatedly playing the role of “completing the paperwork and issuing the purchase order,” simply reinforces stakeholders’ already limited expectations of what value Procurement can add.
To do better, and gain a more meaningful role that realizes more of the potential value in supplier relationships, these “interface functions” must pay attention not only to how they work with suppliers and service providers, but also how they build and manage internal relationships.
Take a two-pronged approach
In our work with VMOs, Governance teams, and Procurement organizations, we have found that success requires work on two fronts. Attempts to gain buy-in from stakeholders only by offering economic analysis, commercial strategy, and the methodology to execute tend to encounter resistance from buyers and end users who don’t feel heard, who believe (and are often right) that those offering “to help” fail to appreciate the impact on them of attempts to source new suppliers, standardize processes, or manage demand. But simply doing a better job of listening, without also bringing to bear the right solutions for the challenges stakeholders really do face, is no better a path to effectiveness or enterprise value. Supplier managers, of whatever stripe or whatever their title, must do a better job of addressing the issues their stakeholders care about, and not just achieving compliance with corporate policies.
First, get the value proposition right
Corporate teams charged with reducing spend, managing third-party risk, or realizing value from external provider relationships can only succeed if they are also addressing the real problems faced by business units and corporate functions that rely on third parties. If we try to convince business units to “let us help” we have to offer to work on problems they care about: not just taking cost out of their budget (and probably reducing their budget at the same time) but, for example, improving the value they get for their money, improving provider performance, and getting providers to bring their “A Team” to the account, offer more innovative pricing models, and actually become accountable for results. Procurement and Supplier Management functions certainly have the tools to do so: providing real value to internal customers is not just about running sourcing events, but it is about helping with process improvement, value discovery, knowing when to in-source, moving to pricing models geared to outputs and outcomes, unbundling, scope management, and more.
But to get anywhere, you must build trust
It’s not enough to profess to “come from Corporate and be here to help.”
Stakeholders have experienced too much heavy-handed, audit- and compliance-
oriented behaviour to believe a Procurement or VMO team when they claim to have
the stakeholder’s interests at heart. Far too many such third-party management
organizations have focused for too long on telling stakeholders what they must
do, referring to it as “herding cats in the business,” and “reigning rogue
spend.” To change those perceptions takes some hard work. Changing the message
helps, but not as much as changing the behavior. Take a look at this recent
article in Outsource Magazine for a useful way to look at your own behaviors:
After many years of sharpening the tools for dealing with third parties, many sourcing and supplier management organizations are coming to realize the importance of taking a closer look at how they manage the internal relationships with the business units and functions. It turns out that those internal stakeholders are not only the intended recipients of the value we hope to create, but are critical enablers to achieving it. But to effectively engage stakeholders in efforts to realize greater value, the “interface functions” must evolve their own value propositions and enhance their ability to influence and build trust.