The Death Of Procurement: Nightmare or Nirvana?
There are those who will celebrate Dalip Raheja’s announcement that ‘Strategic Sourcing Is Dead’. Others may question whether it was ever really alive. But whatever our views, Dalip is yet another thought leader who is calling out the need for fundamental change in the way that goods and services are procured.
At the core of Dalip’s article is the argument that Procurement and Supply Management groups have generally failed to escape the role of supplier-bashing. Whether by mandate or by design, they are perceived as unrelenting cost-cutters and ‘ the flaws (in today’s process) sometimes lead to destruction of overall, or system wide, value’.
Those who have followed IACCM research and the articles in this blog will be aware that the association has been promoting similar thoughts for several years. As the only organization that brings together the buy-side and sell-side of those responsible for forming trading relationships, it is uniquely positioned to bring balance to these discussions. However, as Dalip highlights, understanding the need for change is not the same as executing on that need.
A key point in many analyses of Procurement weakness is the difficulty the function often has in ‘forming relationships’. Cost-cutters and compliance monitors are rarely popular – and most purchasing groups are probably vying with the auditors when it comes to that particular contest. But so much has been written about Procurement transformation, its migration to the ‘top table’, its strategic importance etc. etc. that one has to ask whether it can ever really change – or indeed whether executive management actually wants it to.
Modern business is designed around contention systems. These are the methods by which specialist groups (or business functions) seek to reach consensus on the overall business interest. These systems are often unvwieldy, tend to become bureaucratic and may become destructive (if, for example, power levels become unbalanced or measurement systems distort behavior). Functional frustration with such systems leads many to propose that their particular group should expand its role and have greater power and influence on decisions; not unnaturally, the other groups in the system rarely agree. Occasionally, executives decide a particular group is no longer needed, and they take action to eliminate it, or consolidate it with another group.
I think there is little question that businesses need to change the way they select, form and manage their trading relationships, with suppliers, customers and distribution channels. But a fundamental question is whether existing procurement (or for that matter, contract management) resources are capable of making the necessary transition. Their problem is sometimes the skills and behaviors they bring to their job. On other occasions, it is because management is simply unable to see them in any other role.
But let’s assume for a moment that change is possible – and respond to Dalip’s request for debate. How would I approach this issue with my top management?
First, I would highlight that the complexity of business in today’s global markets has increased and that this is adding to the risks we face (few executives would disagree with that). Next, I would point out that a high proportion of those risks are market related – they arise from failings in meeting customer commitments, or failings to offer the right commitments; they come from failure to oversee and manage the supply base effectively; they come from inadequate market and business intelligence related to new markets, new sources of supply, and the ability to fully evaluate those risks. And I would also suggest that internal rules and bureaucracy are adding to the complexty, either delaying decisions, or leading to the wrong decisions.
Second, I would point out the diversity and volaitility of the markets we serve and the diversity of the levels and types of relationship needed with customers and suppliers. While we certainly do not need infinite variability in how we select, form and manage those relationships, we must also understand that there is no ‘one size fits all’ model. In the interests of speed and responsiveness, we need to find ways to equip the business units to identify and select the right relational offerings, with the right customers and suppliers.
Achieving that model requires the elimination of transaction-oriented Procurement and sell-side contract management organizations, except to the extent that individual business units require continued support (which is then likely to be provided through an outsource relationship for which they pay). This elimination will be achieved through the creation of a Trading Relationship Enablement group which ensures the availability of the guidelines, procedures, policies, tools and templates needed for business success and increased self-sufficiency. This group’s role will include a responsibility to ensure that required expert skills or resources are available – either locally or centrally, depending on the extent and frequency of need and overall business efficiency. It will also act to coordinate the perspectives of the many stakeholders key to success and ensure their views are reconciled and embedded in relevant commercial offerings and practices.
It will reflect both sell and buy side perspectives because a failure to do this will result in dysfunctional behaviors and constrained business capabilities. We buy things only because we sell things. Buying is there to support sales, not frustrate or limit them.
For those who wish to follow this path, a possible title for the senior management proposal might be ‘Achieving Compliance Through The Elimination Of Bureaucracy: A New Approach To The Management Of Business Risk & Opportunity’. I will be delighted to help you develop the presentation!
For others, there is no doubt that incremental change is possible. In either case, the key to progress is to shift your functions role to take far more responsibility for relationship outcomes, not just in terms of cost, but in terms of overall contribution to the performance of the business.