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Do buyers get what they deserve?

December 2, 2013

Last week I wrote about the growing debate over supplier integrity versus buyer competence – and the suggestion that if a buyer lacks contract management skills, they should not engage in complex contracting. (See original post here).

The issue has hit the headlines because of accusations of supplier fraud – deliberate overcharging of customers. This appears to have become more endemic as the world moves to outcome and output based contracts, with more complex charging formulas than a straightforward purchase agreement.

Anyone who has read this blog over the last 5 years will not be surprised that the absence of investment in contract and commercial skills has resulted in major problems. Trading conditions have become more complex; many organizations have adopted new acquisition or delivery models; markets have become more volatile. Yet while IACCM research has revealed that executives recognize the need for enhanced commercial capability, this has rarely translated to major improvement or change.

So what should be done? Two immediate ideas for improvement are:

  • Capability maturity assessments. Already, many buyers require that their suppliers are audited for regulatory compliance (environment, bribery and corruption, labor practices etc). Often these are conducted by third parties. Assessments of commercial and contract capability could be the basis for supplier selection – or indeed of selection of customers by suppliers, since integrity in this field goes in both directions.
  • Relational contracts. The principles underlying ‘relational contracting’ are focused on improved partner selection (pre-award) and governance and performance management (post-award). By clearly defining the mechanisms through which these occur, relational principles not only ensure insight to capabilities, but also create a framework for shared operational management.

Many organizations have been slow to grasp the fundamental impacts of a switch from traditional input-based buying to the more complex environment of procuring outputs and outcomes. The reaction of many has been to boost procurement practices that focus on lowest price rather than highest value and are accompanied by aggressive risk-transfer, together with reduced loyalty to long-term suppliers. These practices have the effect of limiting competition and undermining supplier commitment to performance. It could be argued that they encourage unscrupulous behavior – though there are those who would question whether any supplier is scrupulous if they think they can get away with it.

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