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Procurement Savings Lack Credibility

February 7, 2012

“Procurement – and especially the Procurement consultants and analysts – have blown their credibility.”

That was the verdict of an executive with whom I was talking last week. His point was that the claims of savings generated by procurement are overstated. But he went further: “The process model and methods that have been put in place are based on the retail and manufacturing industries. They do not translate to a world of complex services or projects.”

Our conversation had arisen because we were exploring IACCM’s recent research findings on the cost of poor contracting. Like others, this executive was not surprised by the results, but he made the point that it is now essential to demonstrate how those savings or revenue improvements will be tracked. “We simply can’t go to senior management any longer with abstract numbers that may or may not translate to the bottom line.”

The irony of the IACCM results is that a significant proportion of the financial benefits that flow from improved contracting are in fact the theoretical savings already claimed by Procurement. In other words, better contract management ensures disciplined implementation and on-going governance, including change management and performance management, plus ensuring that commited outcomes are in fact achieved. This discipline is especially critical in any services or project environment.

“Bringing an aggressive retail mentality to project-based industries has done a lot of damge,” we concluded. “It has undermined the loyalty and collaboration that are essential to long-term relationships and unpredictable conditions. The truth is, far from achieving savings, we have probably finished up costing the business more as a result of some of the methods and systems we introduced. They simply aren’t appropriate across all areas of spend.”

The results of IACCM’s ‘Return on Investment’ study have pointed to the areas where there is greatest financial opportunity and we are now exploring these with several corporations, to understand how best to implement and measure improved contract management.

5 Comments
  1. Ian Heptinstall permalink

    Shock horror! Copying observed behaviours from one “successful” business into another might not bring the expected results. Selecting a consultancy which has a big brand, and is staffed by bright young graduates, may not be the best procurement decision either!

    The example you were given Tim doesnt sound like good procurement to me – vested interest disclaimer, I work as a procurement consultant.

    Good procurement is not just about the deal – making it happen is a crucial part of the process. Whether this is called “srm” “spm” or “contract management”, they are integral parts of the whole. As you point out the financial benefits are part of the same thing – they shouldn’t be separate competing silos.

    I dont see how “Procurement…..has blown their credibility” Procurement is the business process which secures and manages the supply base that a business relies on, now and in the future.

    You have given us a good example of how a simplistic approach to procurement, poor measures, or relying on the half-baked advice of the wrong consultants, can really damage a business. IACCM is doing an excellent job of improving procurement behaviours in project environments, but it still reflects good generic procurement practice.

    Maybe a better headling would be “Procurement far too important to be seen as a narrow functional silo”

    • Ian, thanks for this – good comments.

      I should point out that the title was a direct quote from the executive at this particular $100bn+ corporation, not my words. His point was that specifically the claims of savings are not beleived and, in the absence of more credible metrics and on-going validation systems, it has become tough for Procurement to generate interest in new programs. His goal is to ensure that future initiatives are properly assessed and supported by appropriate mechanisms to demonstrate their success.

      • Ian Heptinstall permalink

        Thanks Tim,

        I was never a fan of savings as a measure, for the very reasons that you and the executive described.

        I can see the attraction in hoping you can manage a business by giving functional silos each their own measures and targets, and hoping it will sum to the best for the business. Shame life isnt that simple!

        Procurement performance should be a holistic, business driven measure, that is the responsibility of cross-functional teams. Internal collaboration must surely be a pre-requisite for external collaboration?

  2. Bob Spence permalink

    Tim – based on the data provided in your post, I think I can reasonably guess in which industry your unnamed executive works. I would agree with him that the stated benefits of “procurement” excellence (pace Ian, “srm” “spm” and “contract management” are not interchangeable terms nor are they equivalent with “procurement” in a Major Capital Projects environment, from which I assume said executive hails) have been oversold, not by external consutants, but by internal function heads eager to gain control (financial and political) over $20bn+ annual capital spend. Working as an external consultant in the MCP domain, I am probably equally guilty of carrying a well-worn hammer around these organisations and looking for anything that remotely resembles a nail on which to deploy it with messianic fervor.

    Be that as it may, “procurement” in MCP organisations (which I broadly define as repeatable spend) will only account for 10-12% of the total value of the project, while “contracting” manages the balance. The procurement folks in these organisations have developed valuable skills and methodologies which capital contracting teams should familiarise themselves with and attempt to utilise when formulating contracting strategy for a MCP. Nevertheless, procurement folks need to understand the limits of their discipline when faced with the task of “acquiring” 15 floating LNG plants over 12 years or “purchasing” $2bn worth of engineering, construction, installation, and commissioning services at the 1800m under the surface of the Gulf of Mexico. Because the majority of the cost of these projects is wrapped up in one-off spend and because the effectiveness of this spend is determined more by the quality of the relationship between employer and contractor than the cost of the transaction, the savings and efficiencies promised by “pure” procurement cannot be achieved in this environment.

    In contrast, I’ve observed (as well as implemented) capital contracting processes that do not attempt to reduce the cost of transaction, but to counter the forces that threaten a project’s ROI through better risk management. This is an even less sexy sell to senior project management than cost reduction, but one that I believe is more realistic (and thus achievable) in a MCP environment.

    Cheers,

    Bob

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