Hi all,
Sorry I have been absent for so long, but things have gotten quite busy. I will try to post on this blog somewhat regularly specifically about procurement and contract management, but I also have another blog where I write more frequently about business and how to improve performance. You can see my blog, From Chaos to Order, by clicking here. Enjoy.
Check out this great link from the OECD. It provides a checklist of some of the indicators of procurement risk, all in a nice 2-page document.
When working in the field of procurement, there are a few different skills that you should have:
- negotiation skills – you need to negotiate with suppliers and other business units within your organization
- communication skills – you need to know how to build and manage relationships and be clear in your communications
- organizational skills – you need to follow-up on activities, track service levels and ensure timelines are met
If you are not strong in all of these areas then you need to go out and strengthen your skillset. If procurement becomes a more strategic function of your organization, don’t get left behind because you did not develop additional skills.
After a flurry of activity around procurement last summer, things have been rather quiet lately. Is that a good thing? If you are a public company, generally that is a very good thing. The last thing public companies need is to have their names dragged through the mud due to questionable procurement practices.
So let’s take this time to contemplate the future of procurement. Will it remain a tactical activity used to save organizations money, or will it become more strategic and help craft the vision of the future? I hope it becomes the latter. Here are two reasons why procurement needs to be more of a strategic function:
As a result of the number of people within an organization that are impacted by purchasing, it only makes sense that it should get some face time with the senior executives. Changing procurement models does not happen overnight and impacts the whole organization, so it requires support at the highest levels of the organization.
It amazes me in the day and age of information, that so many companies still mess up the competitive buying process. There are a multiple of resources out there for companies to use to help identify best practices within the competitive process, but companies do not choose to use them. I have seen companies treat the procurement of consulting services like a commodity and focus on the lowest price (which ensures you will likely get the worst result possible), I have seen companies purchase millions of dollars worth of commodities without asking for price bids from other competitors (which means they are not likely getting the best price) and I have seen organizations select million-dollar software systems without knowing what requirements these systems must meet. These examples reek of irresponsible purchasing methods because they are not focused on what is best for the organization, but what is fastest or what falls within the limited skill-set of the purchasing people.
There are three reasons why this happens:
The purchasing within an organization is usually left to the purchasing folks, who do not always have the best insight into the strategy of the organization. It is incumbent upon senior management to make that connection and ensure that purchasing is seen as a strategic, not tactical, part of the company. The purchasing strategy must align with corporate objectives.
People usually don’t know the benefits of planning the process better at the beginning. This would include developing the strategy for procuring, the requirements that need to met (why the good or service is being purchased in the first place) and the criteria that will be used to make the purchasing decision.
Purchasing consulting services is not the same as purchasing commodities. Goods are not the same as services. Different decision-making factors need to be accounted for and most organizations follow the same process for both. Both situations may have many competitors, but an organization cannot treat services like a commodity. The objective of purchasing services should be to find the company that offers the best value for money and meets all the needs of your organization. The objective of purchasing goods should be to find the best price for the product that meets required specifications. There are of course exceptions to these statements, but that is the fundamental difference. Companies need to recognize this and take steps to account for it in the way they purchase. Otherwise you are not maximizing the return on your purchasing investment.
Have you ever been in the predicament where you are going out to competition for a particular product or service and you want to figure out how to avoid some of the problems you are having with your incumbent supplier? I am sure that most of you have.
There is a simple solution to this: identify the areas where your incumbent supplier is not performing well, and use those areas as the major decision-making criteria moving forward. As an example, if your current supplier is frequently late in making deliveries, use on time delivery as one of the important criteria in making the purchasing decision. This still allows for a fair and transparent process, but gives you the ability to select a supplier that is strong in areas where you have previously had concerns.
One of my students once told me that every two years his company holds a competitive purchasing process for a particular service and the same supplier wins every time, even though they do not like working with that supplier. I asked if they continue to use the same evaluation criteria, to which he responded yes. I then asked why he was surprised that they get the same result every time when they have not changed the criteria they use to make the decision.
Has the standard RFP process done away with our ability to forge strong business partnerships? Yes it has.
With many company’s focus on only the bottom line, the strong relationship that provides much additional value has gone the way of the dodo bird. Companies are treating suppliers like commodities and focusing on the lowest price, not the best value. I have three concerns with this focus on only cost:
- it tends to lead to short-term decisions based on cost-savings at the expense of something more sustainable
- it limits the ability and the desire of potential business partners to show additional value or different ways of framing an issue
- it leaves important, strategic buying decisions to tactical staff
I would like to see more organizations strike a balance between the short-term cost-savings and the strong relationships that can be built. There is value is having a longer-term relationship with a supplier, it is time for you to unlock that value and start seeing benefits you did not know were there.
How many times have you put together a RFP, received the responses back, and wished that you had different evaluation criteria? I know that it happens all of the time. I have clients that want to change their evaluation criteria once they have started to review the responses. Good luck on maintaining a fair process when you do that.
So why does this happen so frequently? For two reasons:
1. Companies do not spend enough time determining the right criteria to perform the evaluation
2. Companies cannot anticipate every possible option or solution that potential business partners may propose
So how do we avoid this in the future?
Firstly, companies need to spend more time at the beginning of the process determining what are the right criteria. How important is cost? What about experience? Should we evaluate the team members that are being proposed to do the work? How about other value added services that we did not consider, should those be evaluated? If yes, how? These are only some of the questions that need to be considered. Determine what is most important to the organization and develop criteria accordingly.
Secondly, companies need to host a flexible RFP process that allows for bidders to be creative in their responses. The potential business partners are the experts on what it is you are trying to procure, so why not let them show their expertise? Go out to a RFI process to find out the capabilities of the marketplace, then go to a full RFP once you have short-listed based on capabilities. Develop a pre-qualified roster program so that you can be creative with your business partners in coming up with the best solution, a collaborative solution.
The evaluation process is flawed because it would be impossible for any company to anticipate all possible criteria to be evaluated, so we need to follow the advice above in order to make better decisions.
In a word-YES. This is going to be a three-part series on why the RFP process is flawed. The three parts will cover the requirements, the evaluation and the relationship.
Think of your typical RFP process. You identify your requirements, you write everything up in a pretty document, you send it out, a bunch of people respond, you select someone based on arbitrary criteria that you have selected and you start working together. Is this really the best way to find a capable (or even better, an exceptional) partner?
Since you are likely not an expert in what you are trying to procure through a competitive process, how do you know that the requirements you identify are correct? They are generally not based on best practices or new innovations or creative solutions. They are based on what you know from past experiences. You cannot expect to have an accurate set of requirements without having input from experts who do this everyday and have done it successfully with clients of all sizes in many different industries. The RFP process does not allow for that. It only allows for you to select the best company based on what you have identified as your needs.
The RFP process is limited in that it only allows you to evaluate based on what you think your needs or requirements are, without any input from experts as to what those might actually be. RFPs are focused on short-term solutions and generally heavily focused on who has the best price, not who can best get results for an organization. Is that the way you want to do business?
