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.
Most organisations proclaim they are open to new ideas and are seeking to be ‘at the leading edge’. This is true even in a traditionally conservative area such as contracting or risk management.
Yet where do these organisations and their leaders seek those new ideas? Many rely on the quality of the people they hire. They are confident that they innovate because of the intelligence and knowledge of their highly skilled (and often highly paid) professional staff. Others seek new ideas through articles or case studies delivered by magazines, webcasts or conferences. Some may use consultants as a periodic source of ideas and a few will undertake research or commission benchmarks to validate their performance, frequently from organizsations with limited insight (ideally they reflect only the perspective of the function in question and therefore won’t ask too many tough questions).
In truth, most functional groups are not especially open or welcoming of new ideas or innovative approaches to old problems. Many do not welcome suggestions that things could be done better. Quite a number are in denial that there are problems – and those that exist are someone else’s fault, and therefore not their responsibilty to fix. When these groups discover new ideas or methods, there is a tendency to think of all the reasons why ‘it wouldn’t work here’. This is especially true of anecdotal evidence (which is the type they often prefer), because individual case studies are in part interesting precisely because they can be dismissed as ‘not applicable’.
It is also rare to find examples of cross-functional collaboration to identify sources of improvement. Most functions prevent internal analysis or constructive criticism of their services.
Yet all the evidence shows that innovation depends on a readiness to listen to and work with outsiders. It is through the combination of their perspectives and our knowledge that we come up with new approaches.
Often, it takes a dramatic shock to open eyes and ears to innovation. If a company survives the shock, it goes through a period of soul-searching and true openness to innovation and change (of course, some resist and continue on a downward spiral). But it seems sad that we cannot become enthusiasts for change and continuous improvement. It should be a source of real pride that we are evolving and adding new sources of value. We should be eager to list the ways we have changed ourselves, our processes and those of others; have you thought about the list of improvements you have initiated recently? Are you an innovator, or just waiting for the external pressure to force change upon you?
Tim Minahan, CMO at Ariba, wrote a comment in response to my blog of July 13th on The State of Customer/Supplier Relationships.
Tim made the following observations: “As we’ve discussed in the past, collaboration is often more lip service than a committed initiative. And tough economic periods, like the one we just went through (are still in?) strain even those most committed to real buyer-seller collaboration.
However, the idea somehow that online sourcing and procurement tools are enemies to collaboration is misguided for three key reasons (possibly more):
1) online sourcing tools bring a transparency and openness to negotiations that is often lacking from offline negotiations.
2) leading online sourcing tools enable greater buyer-seller collaboration during the negotiation process, often times allowing suppliers to provide alternative bundles, delivery schedules, or product or process innovation recommendations that can enhance the value of the good/service being purchased and take cost out of the system — without negatively impacting the supplier’s profit margins
3) finally, we must be careful not to confuse the negotiation with the relationship. Such online tools speed sourcing cycles 50%-70%, giving buyers and sellers more time to focus on collaboration and relationship management. (In fact, we’re seeing far greater demand for our supplier collaboration and management solutions from those companies with online sourcing tools than those without.)
Bottomline: I agree that buyers and sellers need to put more commitment into their collaboration oaths. But online negotiation tools and collaboration can not only peacefully co-exist but actually can enhance one another.”
These comments in many respects complement those made in a recent IACCM ‘Ask The Expert’ interview with reverse-auction guru Dr David Wyld (visit the IACCM Member Library to hear a recording). David is an avid proponent of the applications now available to support business transactions and contracting – but of course he stresses that their effectiveness depends on correct use. Introducing reverse-auction software represents a major change-management initiative – and organizations that simply implement it without re-thinking process, without investing in internal and supplier training, without ensuring understanding of its correct use relative to differing contract and relationship types will have problems.
Automation is here to stay because the benefits are undeniable. Ten years ago, I remember feeling (as a supplier) very hostile to the new procurement software tools. Today, I still encounter frequent problems in the way they are used. But in truth, the biggest issue is a lack of imagination and aptitude by the user community. It is once more a case of ‘a bad workman blaming his tools’. So this is the problem on which we must focus.
The media is full of threats by business to uproot and move from highly regulated countries. Banks and financial institutions are among the most vocal, but a story in Forbes illustrates that the issue affects other industries, in this instance medical devices and pharmaceuticals.
Of course, at one level we all know there is a lot of sabre-rattling when new legislation is proposed and many of these threats are simply posturing. But there is little doubt that highly regulated environments damage international competitiveness over time, because they discourage investment and push innovation off-shore (a point highlighted by the Forbes report). Too many rules cause longer cycle times, added complexity and increased costs of doing business. Too few rules produce risks to social or individual well-being. It is a tough balance for governments to strike, especially when competitor nations are always ready to take advantage of whatever steps they take …
In the end, businesses face the same dilemma as they decide how best to form and manage their trading relationships. Too much ‘due diligence’ makes them unattractive to do business with, but too little is risky. How do we find a balance?
Part of the answer may be a need to pre-qualify potential customers and suppliers, to ‘segment’ relationships on their relative desirability. That sounds a daunting task, especially in today’s global markets. But in fact there is data emerging from a multitude of sources and it should be used by smart procurement and contracts groups to assist faster determination of relative risk and required contract terms and strategies – for customers or suppliers.
An example comes from another article in Forbes, which highlights a list of ‘most trusted’ companies. These are organizations that history suggests really do care about their reputation and take real steps to ensure they do the right thing. Perhaps they represent an ‘A-;list’ of potential customers and suppliers. Governance Metrics International has developed a database of more than 4,000 companies for which it has ascribed a ‘corporate governance’ score (you can view the top 20 here). There are many more examples of organizations developing tools and databases that will assist in assesing the likely reliability (or relative risk) of suppliers (Ariba, Beroe, Alliantist are just some examples of these providers). Audit Integrity has produced an analysis of the ‘most trustworthy companies’.
Unreliable suppliers and customers cause many hidden costs. But often, the pressures to make decisions and get deals signed (or to judge on narrow parameters such as cheapest supply) lead us to pick the wrong trading partners, or to under-estimate the hiddent costs of doing business with them. We discover this only through experience. Increasingly, sophisticated organizations will become more proactive in managing risk, by assembling market knowledge and criteria that helps them understand (and justify) which organizations are worth a premium price, or an extra discount, to ensure their business – and which organizations should be charged a premium or avoided altogether.
We all understand the principle of using insurance to cover risks. We recognize that insurance demands payment of a premium. Selecting the best and most responsible customers and suppliers will also demand a premium – but it is a price increasingly worth paying.
The Logistics Viewpoints blog raises some good questions about the scope of most supply chain risk assessments and preparations. In the story of a well-fed turkey, the article highlights our tendency to focus on the most obvious questions and to ignore the ‘what if’s’ associated with our future.
In their excellent report earlier this year, insurance consultants MacTavish made similar observations regarding the tendency of risk management to focus on the past, rather than provision for the future. The turkey probably could not have avoided its fate, no matter how much it planned. Hopefully, the same is not true for us.
The Logistics Viewpoints article concentrates on forecasting, which is after all a fundamental element of many negotiations and post-award contract management. “Forecasting is based on history. Many supply chain and financial forecasting models are based on bell curves, with the tails of the curve representing highly unlikely events that can be “safely” ignored, at least for forecasting purposes. But a little examination of history will show that rude surprises, like the global financial meltdown we recently experienced, can intrude. All forecasts are thrown out the window when such catastrophic events occur. That is why companies should apply supply chain risk management to product forecasts and not just to factories, suppliers, and IT systems.”
The point it makes is that organizations rarely undertake scenario planning related to major shifts in forecast – up or down. And given the diversity and volatility of the markets in which we trade today, it is time that we undertook more scenario planning and increased our capbility to deal with the unexpected. Indeed, in previous blogs, I have highlighted how the role for many in the supply chain and commercial world requires them to act increasingly as ‘managers of uncertainty’. At the corporate level, this ability is set to become a major source of competitive advantage.
In an article on the BNET site, Geoffrey James seeks to identify the top 5 groups that ‘cripple sales efforts’. In fact, his article ultimately concentrates more on the attitudes and behaviors that undermine successful selling – and he is not averse to blaming the Sales organization itself for some of the failures.
James’s comments are focused on selling complex b2b solutions, which he rightly suggests require a team effort. His five ‘sources of failure’ are:
- Double-booking: operations groups over-commit against their support capabilities
- Finger-pointing: sales organizations destroy teamwork by looking for scapegoats, people to blame
- Penny-pinching: finance cuts so deeply into budgets that critical travel or training for required team members is not possible
- Stove-piping: support functions pursue functional goals without understanding their impact on generating revenue
- Showboating: sales people treat others badly because they beleive they are the only important function
I think these are all interesting factors and I am sure many in the world of contracts and negotiations have encountered them. However, I think the most fundamental issues are missing – and ‘blame’ is therefore being allocated in the wrong places.
- Dysfunctional measurements: executive management fails to create the right management system to encourage collaborative behaviors. Remuneration and performance systems that maybe worked well in an era of commodity sales are still being used to drive (or frustrate) complex services and solutions.
- Dishonesty: Sales organizations like closing deals. They often like it to the point that they do not mind whether the customer’s needs have been fully understood, or the risks of non-performance adequately assessed. The attitude is ‘ we’ll worry about that later’.
- Poor communications: customers are often their own worst enemy. They are unclear about requirements; they frustrate in-depth discussion with vendor staff; they take the view that performance is the supplier’s problem. Sales are often complicit in this because they do not want ‘tough issues’ to be raised.
The good news is that Mr James did not highlight contracting as one of the big obstacles, except perhaps in the context of stove-piping. But wouldn’t it be great if our community was in fact associated with proposing solutions to the problems, rather than being part of them? After all, we claim to be good at risk management – and what greater risk is there than having our company struggle to close revenue?
An article in GT News offers valuable insights into the world of accounts payable – and should alert those enaged in contracts to several issues that need our input.
The article discusses the latest trends in e-invoicing and highlights its rapid growth. In the US, there are forecasts that the number of e-invoices will overtake paper invoices in 2011. Many will welcome this development since it clearly represents a source of increased efficiency – for example, it leads to fewer errors and shortens approval times (industry estimates suggest these fall from an average of around 25 days in the paper-based system to just 10 – 15 days).
So suppliers may be excited by the prospect of earlier payments – but they would be wrong. As most know, large corporations have used the recession as a further excuse to prolong the payment term – now running at an average of 56 days, versus 53 days a year ago. So approvals are getting faster while payment is getting slower. And the large corporates are simply piling up the cash.
This is where the story becomes really interesting. The article tells us: “Large companies have emerged from the financial crisis with record levels of cash: the S&P 500 industrial companies increased their holdings of cash and marketable securities to US$820bn, up 27% from a year earlier. What is more, an analysis of the 500 largest non-financial US companies by the Wall Street Journal reveals that the cash to assets ratio has reached 9.8%, up from values between 4% and 6% in the 1990s (a similar study by Goldman Sachs reports a jump from 6% in 2002 to more than 10% today).”
But this windfall for the largest companies is at the expense of many of their suppliers. The SME market has seen a reverse trend. Their cash reserves have fallen and “small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank. Moreover, often credit is not readily available, forcing many SMEs to factor their receivables, frequently at interest rates of 10-20% annually. The worldwide factoring market in 2009 was a stunning US$1.8 trillion.”
So we have a picture in which the largest companies have used the recession to build their war-chests, in part at the expense of their suppliers. And now, armed with this data and all the insights that they are gaining from their new e-invoicing systems, Finance managers see a new opportunity to turn the screw. Rather than thinking about supplier liquidity as a problem, they see it as an opportunity. They are preparing either to offer factoring services, or to increase their use of early payment discounts.
Their new electronic systems offer a far more efficient way to manage such programs, including the ability for selective application or to turn the system on or off depending on cash needs. “The cumulative amount of business-to-business (B2B) invoices approved but awaiting payment has never been higher. These invoices can be used to improve working capital or profits. Upon approval, the buyer can either guarantee payment of an invoice (reverse factoring/supply chain finance (SCF)), or pay the invoice early against attractive additional discounts (dynamic discounting).”
Should those of us in the world of contracting and procurement care about this? Well, as suppliers, many of us will obviously not be happy about this trend and its impact on our business. But those in Procurement should also be asking questions, rather than allowing this financially driven shift to take place by default. In my response to the article, I made the following observation:
“This analysis is typical of that used within the finance community, but ignores the broader economic cost of such policies. First, companies pay a premium when they delay. Suppliers are not stupid – they mark up their price to take account of the delay or to cover the early payment discount. Second, such behavior by large corporates jeopardises the performance (and sometimes survival) of their suppliers. This can have significant downstream consequences as suppliers struggle to cut corners and cut costs. Smart finance experts also examine the broader business consequences of their behavior.”
Just because we can do something does not necessarily make it right or make it wise. If you work in a large corporation, be sure that you are involved in this debate. And if you work in an SME, be prepared; decide now what policies you will put in place to protect yourself from the impacts of this financial engineering.
‘If only we had been involved earlier’ is a comment that occurs with great regularity from those in the world of contracting.
There is no question that the contribution of contracts expertise – buy-side, sell-side or legal – can make a tremendous difference to outcomes. And much of this potential for value is down to timing. The reason why many feel frustrated is because their late involvement often results in poorly defined requirements, ill-considered commitments or badly structured relationships that fail to realise the full business opportunity.
This issue of timing can arise in the bid, negotiation or change management phases. My experience – confirmed by IACCM’s research – leads me to agree that late involvement by qualified contracts and commercial resources costs many businesses a lot of time and money. It frequently sub-optimises opportunities, delays their closure or results in poorly assessed risks.
But for those who exprience this problem, I suggest there are two fundamental questions to answer. The first of these is to ask “Why does it happen?” Many times it is because the business or opportunity owner simply doesn’t want ‘the people from contracts (or legal, or procurement)’ involved any longer than necessary. Their image is often not that of a real ‘team player’ and there is a concern that their negative views (of risk, in particular) will de-rail or delay the deal. But even when the business would welcome early involvement, I often find the commercial / contracts / legal group reluctant to provide it. They are frequently too busy to get engaged in the up-front phases of deal structuring or strategy.
The second question is: “How might it be addressed?” Many businesses have failed to think about how to achieve early intervention in a resource and cost-efficient manner. They have also failed to consider the use of technology. As a result, physical resources are engaged in far too many situations and they are frequently absorbed in repetitive, low-value tasks and fire-fighting. This adds to their reputation as tactical and risk-oriented.
There are two immediate steps that any contracts group can take. One is to increase their alignment with product or service management. By understanding the markets in which products or services will compete, we can ensure the terms being offered are appropriate to these markets and reduce the frequency of exceptions and negotiations. Contract standards are structured to support business needs, rather than the ‘one size fits all’ approach that is a business imposition, or the ‘every case is different’ argumant, which means no established contract standards and guarantees the need for negotiation every time.
And secondly, we must escape the assumption that commercial acumen is always delivered by physical means. The most successful organizations are those that empower good decision making early in the process – and they can do this by a mix of education and information availability. With today’s technology, we have no excuse for failing to deliver the rght tools and knowledge to the business.
So my advice to those who say ‘If only we had been involved earlier’ is to ask the question ‘What do we need to do differently to make sure that the business has the benefit of our knowledge and skills when and where they are needed?’
The latest edition of Strategy+Business offers an excellent article on building and maintaining company brand. Although written with a focus on consumer markets, the concepts have universal application. It is essential reading for anyone involved in contracting and negotiation.
The article suggests that brand management is no longer the preserve of the Marketing department. “Trust in brands has diminished and customers are more likely to view brands cynically, and to feel uncomfortable with brands’ desire to control. This has created a challenge for many brand owners, because they are ill equipped to cope with greater openness.”
Today’s successful brands engage a growing number of stakeholders – internal and external – in promoting the corporate image and developing its products and services. This challenges many traditional concepts of how relationships are managed, as well as demanding new approaches to information flows and intellectual property.
Back in the mid-1990s, when I was working at IBM, the then CEO Lou Gerstner took the view that contracting was ‘primarily about brand image’. He saw that the process as well as the individual terms and conditions sent a clear message to customers about how much they were respected and the extent to which they could trust IBM as a partner and supplier. This led to a transformation in the way that IBM formed and managed its contracts – creating approaches from which it still benefits today.
Gerstner was ahead of his time in making this connection. The Strategy+Business article indicates that he was not alone – and that it is time for others to catch up. If brands are to be trusted, they must be more overt about the commitments they will make and more open in their management and achievement. Contracts and commercial experts must apply serious thought to the image that is transmitted by current terms and contracting policies. As revealed by IACCM‘s research, most contracts and negotiations today are surrounded by concepts of secrecy, control and limiting obligations. For example, many transactions are preceded by some form of confidentiality or non-disclosure agreement; big companies seek to abrogate all intellectual property rights; organizations battle long and hard to limit liabilities, indemnities and warranties; we resist clauses that might imply openness in areas such as audit or benchmarking. And the more important the deal, the more we apply long and laborious review and approval procedures that often imply either a lack of trust or an absence of competence.
“Although we might argue that the very essence of brands is about trust …. in reality trust has often been missing. Organizations have trusted neither their customers nor their employees. As Francis Fukuyama notes in his book Trust: The Social Virtues and the Creation of Prosperity (Free Press, 1995), the “assumption that trust does not exist in the system” contributes significantly to the high cost of doing business in certain business sectors and societies. When there is a want of trust, organizations spend much time and effort watching and monitoring what people do. Brand delivery is jeopardized by the constraints placed on employees, who respond to the lack of trust either by finding ways around rules and procedures or by telling managers what they want to hear.”
Of course contracts and commercial management alone are not the drivers of brand image. But they are a fundamental component. In the words of one executive: “We had to let go of the old-fashioned concept of an organization built on mistrust and rules. Instead, we started focusing on trust between people; between ourselves and our customers and between the management and the staff.”
In this new world, “Trust has to be earned over time through the experience of promises delivered, which means less of a focus on telling people about how great your brand is and more on building relevant content”. This means that the contracting process must switch its role from protection against failure to enabling success. It becomes strongly focused on the matching of needs and capabilities, to generate clear commitments and a governance process through which they will be delivered. Failure is an after-thought, rather than the dominant concept.
To achieve this new world, as the S+B article so clearly reveals, there has to be trust and honesty throughout the organization – and that means we must ensure the marketing hype and the sales promises accurately reflect what we can and will do for our customers (or indeed, on the other side of the coin, for our suppliers). So the start of this journey is to ensure a far more holistic appreciation of the risks we are managing and the adaptations we must make if we are to build a long-term, successful brand.
In earlier blogs, I have highlighted the 2010 IBM CEO Survey ‘Capitalizing on Complexity’. I am very much looking forward to discussing the implications of this study with three Procurement executives on a webinar ‘Finding Ways To Capitalize On Complexity’.
As the title implies, the purpose of the discussion is to explore how Procurement can best respond to the needs that were identified by more than 1,500 CEOs who participated in teh IBM study. In particular, what are they doing – or what can they do – to improve Procurement’s contribution to risk management, the elimination of bureaucracy and improving the quality of customer relationships?
These are not areas of great strength for most Procurement groups. They tend today to be far more associated with risk avoidance than with its management; many would see them as a source of bureaucracy, rather than its eliminator; and the image of Procurement in groups like Sales and Marketing is rarely positive.
Today’s planning session for the webcast generated some lively discussion and revealed three enlightened leaders – though perhaps sometimes strruggling with traditional perceptions of the Procurement role and with how best to escape the constraints of today’s organization and measurements.
The conversation promises to be lively – you can see more details and register by clicking here.
IACCM will continue to explore the implications of the IBM CEO survey and its work will also be embracing the sell-side contract and commercial perspective.
Commitment Matters 