When Iron Mountain's new CEO first met with senior leadership, each attendee introduced themselves and their areas of responsibility. When my turn arrived, I proudly stated: "Linda Behan, Senior Vice President, Global Procurement." Without hesitation, the CEO's response was, "Oh, Purchasing - the people you love to hate!" While not exactly the reaction I was hoping for, I recognize that the sentiment is one that's age-old and still pervasive in many companies. How do we de-bunk, once and for all, the myth that the Procurement function exists only to slow things down and cause aggravation? I recently took some time to dissect our function's reputational problem, and I presented the findings to my professional peers. The following is a summary of the presentation I made at SIG, Spring 2015.
Formal strategic sourcing methodology and category planning was originally brought to life in the manufacturing sector decades ago, where direct costs drove the bottom line and a smart purchasing strategy was a real competitive advantage. The approach of sharing wisdom and value with one's suppliers was born: broader buying power allowed vendors to increase their total revenue and at the same time, improve quality and reduce unit costs. Those companies that did a good job of mitigating costs and partnering with the right vendors outpaced those of their non-strategic peers.
Since then, our function has matured significantly. The caliber of resources drawn to Procurement has elevated, information and enabling technology has improved, and we regularly apply more strategic approaches to end-to-end supply chain management. So why is it that our reputation is still so negative? When both vendors and businesses win as a result of Procurement's involvement, what's there to be unhappy about? Why are we still the people that companies love to hate?
In an attempt to answer this question, I engaged a number of well-respected and experienced sales and business executives to divulge their greatest frustrations with Procurement departments, and to identify possible alternative approaches that respect the need to deliver value and mitigate business and financial risk in our business, but that might create a more positive experience for those involved in the buying process.
The myths and reality of Procurement
Survey a room of buy- side and sell side participants, and ask them what negative perceptions of Procurement exist. Here's what you'll unanimously hear:
Focuses solely on reducing unit price
Holds rigidly to a process - "make us bid everything" "commoditize everything"
These perceptions exist for a reason. Below, I discuss why these perceptions persist, and what we might do differently as a function to eliminate or transform them.
Focused on Price Only
What gets measured gets done. Procurement groups can get caught up in tracking achievements of what is "easily" measured, or metrics that are misaligned with business goals. Unit price changes are relatively easy to measure, but value is not. As we've discussed, Procurement has its historical roots in achieving direct cost savings, and most Procurement groups have not evolved from using savings as the primary success metric. However, today we acknowledge that the value of a strategic Purchasing group extends far beyond cutting unit costs. Unfortunately, Procurement organizations that are measured and rewarded primarily on cost savings will prioritize these concerns, even if that objective is not aligned with the business priorities in that buy. For example, if the business knows that speed to market will increase revenue and enable the business to outpace the competition, Procurement's approach of taking five months to competitively bid will not be received well.
Instead of setting Procurement success metrics in the silo of the function, Purchasing groups should work to gain visibility to the objectives of the business and to understand how they in turn are measured. Broaden the discussion with the business to reflect total value including potential in optimized end to end processes, cash management, specification improvement, demand management, insourcing / outsourcing, speed to market, resource efficiency, return on investment, risk mitigation, regulatory compliance, etc. While this approach is admittedly more difficult, it eliminates the possibility that Procurement is pegged as being focused on price only.
"Makes us bid everything"
Procurement organizations may force a competitive bid mandate as a way of interjecting themselves into a vendor selection or negotiation process. Other functional colleagues, such as finance and internal audit, may place even further pressure on purchasing to utilize RFPs as the sole mechanism in determining fair price for equivalent products or services. Through this process the procurement group works to bring everything to a common need (commodity) and compare unit pricing.
While this mandate does create consistency in that it ensures a single consistent method to evaluate providers and pricing, forcing all purchases or contractual renewals to be competitively bid and commoditizing everything is actually not in the best interest of our stakeholders or our suppliers. Competitive bids are a very useful tool that procurement organizations should utilize in certain circumstances; however, RFPs are not the only mechanism for making appropriate supplier selections or informing pricing negotiations. A "bid everything" approach will invariably alienate hard-to-influence areas like HR, Marketing, Real Estate, and potentially undermine Procurement's credibility.
If you introduce competition simply to lower the price of the incumbent for the same volume (same for less) you have essentially:
Failed to bring creative / broader solutions to the table,
Disabled the opportunity for sharing in the financial benefits from broader / larger purchase opportunity in exchange for overall total cost reduction (win-win),
Damaged your hard-earned reputation for providing fair access to your business. Put another way: if, when you go out to market, you are not genuinely evaluating all participating providers equally and objectively, your "competitive bid" lacks credibility and is therefore arguably unethical".
If you're relying solely on the tactic of competitive bids to understand the market, you probably haven't completed your due diligence, and you're likely unnecessarily including vendors in the mix that are not capable of meeting your needs.
Some additional vendor complaints include; participating in bids with dozens of other vendor respondents, lengthy RFP documents that clearly have not been read, and RFP's drafted by other vendors. While you would think that explaining why these tracts would be unnecessary, unfortunately they are a reality in our world.
Participating in Bids with Dozens of Vendors:
Ask yourself, "Are all of these vendors ideally suited to support my business? Will all of them be fully being considered?" You should be able to answer yes to both questions. If you are going to bid, be sure to pre-qualify the suppliers, and only invite a pool of vendors that is truly being offered an opportunity to win your business.
Recent research reveals that Procurement professionals spend an average of 2.5 hours reviewing supplier proposals in an RFP, regardless of proposal length. What does this statistic tell us? That, unfortunately for vendors, we don't read (or fully read) RFP responses.
Impose limits on proposal length. Force respondents to be concise and to highlight what differentiates them. Respect the time and commitment vendors invest in responding to these requests.
RFPs drafted by other vendors
Vendors know when another vendor has contributed to or written the RFP requirements. This practice is problematic for several reasons. First, the requirements will be based on a specific vendor's answer to a problem, and will highlight their strengths - so that the questions and requirements will be inevitably biased. Second, if you can't articulate your business' requirements yourself without a vendor's assistance, it's possible you're only considering the market so that you can check off the "competitive bid?" box. Don't fall into that trap.
Today there is a wealth of information available to procurement professionals that can be used to support the evaluation of fair cost. If it's sole source, it's sole source. Use market intelligence to understand what is fair value. It's not the vendors' fault you were late to the game. There is enough information available today to have a credible negotiation without introducing false competition. Invest in these alternative sources for information including consultants, market intelligence sources like CEB, SIG, Procurement Leaders, and Hackett as an alternative to a competitive bid when it makes sense.
Utilize competitive bids when it makes sense - when they will enable business priorities, and when they will have credibility. Treat everyone and the process with respectful engagement, and everyone will win. Not every supplier can or will be selected, but Procurement will earn the reputation of managing a process with integrity where vendors will want to invest time and energy responding in the future.
Standard Contract Templates: While standard contract templates and common processes can and often do force a more optimal starting position for legal terms, they will not fit every scenario. Use standards to drive consistency and comparability, however be flexible when it makes sense. Listen to the reasoning behind supplier-requested modifications and negotiate based on the business reasoning behind the two opposing positions.
Operates in a Silo:
Procurement organizations often use the old "You can't talk to anyone other than Procurement" line to avoid the divide and conquer tactics from sales. Unfortunately, Procurement functions do not know everything. All companies have differentiating capabilities; to ignore those differences could be denying opportunities to introduce new ideas and/or drive efficiencies for your business. Talk to your vendors and provide access to your business and functional owners, and have them directly articulate their challenges. Ask vendors directly what value they believe they can bring to your business. Say: "Here is what we think we need, and how we are doing it now. How would you answer this need?"
Late to the Engagement; Slows us Down
I often hear purchasing departments say, "If they [the business] would just engage me, I could add so much value." But if the business engages you only to finalize a contract or execute the purchase, you are way too late to add much value anyway. At that point, the business has already determined what they want to buy, who they want to purchase it from, and have probably already engaged in preliminary negotiations. You have missed the opportunity to proactively understand the business concerns driving the purchase and to offer other alternatives that could better meet their needs. At that point, it's true - all you are doing is slowing things down, and creating hassle in finalizing a contract that you have very little leverage to modify.
The range of Procurement capabilities includes the entire strategic sourcing cycle: Analyze, Strategize, Source, Execute, and Manage. When the procurement function engages as only a contracting agent or PO processing organization, its total value is muted. The earlier in the cycle the procurement function collaborates with the business to define the need, the greater the impact the department will have - and there will be no slow down associated with Procurement's involvement. Category Planning is a tool to enable proactive research and business engagement. Procurement must bring opportunities to the business, not the other way around.
If you are not proactively engaging your business constituents, you will eternally be chasing them down the train tracks. In order to deliver the value your businesses need, you need to move away from what Purchasing thinks the business needs, and gain an in depth understanding of the business challenges. Change your approach by melding your unique understanding of cross organizational spending, market awareness, and their business challenges. Synthesize this information and identify opportunities that will help your internal clients meet their objectives. Move away from reactive engagement to proactively bringing opportunities to them that may be of value to them.
Procurement often has the best - sometimes, the only - view across the enterprise. We have accountability and are uniquely positioned to leverage spending across business units and function. All functions and business units need common things from the supply chain: office supplies, professional services, information technology, travel, etc. Procurement has a unique view of cross-functional spending and also on the pulse of what is happening in the supply market (vendor consolidation, new products/services, financial risk, etc.). It's surprising, even in the largest companies, how little the business understands about total spending and vendor populations. Procurement has information that provides transparency to cross-functional / cross-business spending by category, by geography, etc. Spend analytics providers do an effective job of aggregating and cleansing information from various distributed ERP / financial systems to support opportunity assessments.
Use category planning as a tactical tool to understand the market, spend, business concerns, risks, expiring contracts, and proactively engage the business with a wealth of information that can offer up possibilities to them. These discussions will help the business prioritize opportunities, as the information Procurement provides will drive focus on larger, more strategic opportunities as opposed to reactive responses to business demands.
Our world is always changing: the economy, geo-political impacts, the environment, regulatory requirements, etc. Procurement organizations are often generalists, but we need to be on a constant quest to learn and keep pace with key changes in the business and supply market in order to have credibility with our business partners and vendors. How can we stay on top of the changes?
Invest in Intelligence: Know what you know, but more importantly, know what you don't know. As a procurement leader it's important to invest to help your organization learn and stay on the pulse of what's happening in their categories. Invest in a multitude of sources to understand the market before you engage your stakeholders and the market. Invest in market and business intelligence resources. Stay up on industry forums, training/seminars, newsletters, blogs, webinars. Talk to your suppliers - they know stuff. The better you understand the categories you are managing and the needs of your internal constituents, the less likely you will be treated as an outsider.
Understand your internal client: Seek to understand their current business challenges. Gain visibility to their business strategy and plans to execute. Ask for and align to the business' goals & objectives, and metrics.
Invest in Strategic Hires: In expanding my category team to focus on marketing/events/advertising, I recently hired a seasoned marketing professional from one of the largest consulting firms in the world. This individual had no formal procurement experience, but by the nature of her prior work interacted with procurement functions and marketing vendors. We've made an investment in teaching her the procurement side of the equation. As a result, this strategic hire has been incredibly successful in making inroads and gaining credibility for the Procurement group in a historically difficult category to infiltrate. She now operates as an integral part of the marketing business, and her success is best summarized in a recent quote from our CMO office: "She gets it."
Don't make excuses. We must own our reputation as procurement professionals, internally and externally, every day.
Remember, every company is buying something and selling something. Place yourself at the other side of the table and talk to your sales force, talk to your vendors, and try to see things from their perspective!
Stop complaining that the business didn't get us involved in time, or doesn't want to work with us. Instead, change how you engage your business.
Do your homework. Get informed and keep learning.
Pick your battles; in other words, Lighten up, for crying out loud!" Yes, we have challenges and significant responsibilities, but think about what your internal clients are trying to do: grow revenue, meet sales targets, solve external client issues, automate processes, etc. A little flexibility can go a long way towards building trust and partnership.
"What gets measured gets done." Be very careful about setting the department's goals and objectives. Try to understand the good and bad behaviors that your goals will inspire. Attempt to change the value measure to what your internal clients perceive as important, and move away from traditional cost saving / unit savings metrics.
Follow these simple tenets and not only will you be better at what you do, you'll enjoy it better too.