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Making a Trusted Advisor of the Procurement Function

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Please welcome guest-blogger Bill Young, a Management Consultant. We have high regard for this person and we think you’ll enjoy the content.

The procurement function in an organization can play an important role—potentially both strategic and advisory. It can also, however, be dragged down into petty negativism. It’s in everyone’s interest to get it right.

Getting it right is the subject of a new article by the two of us, called The Role of Procurement as Trusted Advisor to Management. Link to a.pdf version here.

Following is a quick overview.

Procurement as Strategic Partner

Ideally, a firm’s procurement function helps broadly. Of course it manages the buying of commodity stuff cheaply.  It should also design good overall purchasing processes.  But ultimately it should also help an organization invest its expenditures wisely.

That last is a mandate most CPOs and CEOs alike would welcome—in principle. But they rarely get there, because procurement gets bogged down in a classic trust conflict: the conflict between transactions and relationships.

Procurement has pushed hard to attract brighter and better staff, but capability is not enough.  A genuine understanding of and concern for clients’ ambitions and goals is needed: procurement needs to be benevolent as well as capable in the way it works with clients.

The Transaction Trap

Most organizations measure procurement by how much they can cut cost.  This simple fact—the focus on cost savings as a metric—has outsized influence.  It means discussions are always about price—but not value.  Expenses—but not expenditures.  Cuts—but not contexts.

The cost savings focus drives procurement to excessively favor market-based, impersonal processes—which too often prevent the value of trusted relationships with suppliers. The transactional focus implied by cost metrics also favors explicit contracting, rather than the constructive use of implicit contracts on occasion.

This focus also leads to destructive gaming: you can’t prove savings if you’ve already cut the source of waste by strategically redefining processes, hence procurement organizations are tempted to “squirrel away” savings to appear the biggest.  The cost focus also means that purchasing’s clients know that ‘savings’ just means their budget is going to get cut.

The whole ‘savings’ focus drives dysfunctional, non-strategic behavior by everyone.  And it’s gotten worse since 2009: CPOs and CEOs alike, in a bad economic environment, have said, “Just go find some savings.”

The Trust Cure

It’s not often that we should start with metrics instead of strategy, but this may be the cart that should drive the horse.  Instead of focusing so extremely on cost savings, we suggest procurement focus on a Spend Control Index.  Details will vary by organization, but the gist of it is a unified scorecard that makes procurement accountable for all external spend—based on revenue, adjusted for items like salaries, interest, and above all, linked directly to strategic decisions.

Such an approach is easily linked to strategy; it enhances strategy implementation; and it is easily auditable. Most importantly, it allows for reframing of discussions between management and procurement; allowing the latter to behave like a trusted advisor.

Read the whole article here, or in .pdf form here.

The Trouble with Buying Processes

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Big companies have a process for buying things. They define the specs, they shop the vendors, they use specialized purchasing departments to define procedures and processes.

They have similar processes for recruiting human capital (aka human beings). Define the specs, shop the vendors, use special processes.

And ditto for selling. Define targets, channels, measure hit rates, etc.

What these processes all have in common is a focus on the efficiency of the process—and not so much on the effectiveness of the result.

Purchasing managers, HR recruiters and sales managers alike would benefit from Malcolm Gladwell’s recent New Yorker piece title Most Likely to Succeed: How Do We Hire When We Can’t Tell Who’s Right for the Job?

Gladwell’s opening metaphor is about predicting the success of a college football quarterback in the pro game. Despite extraordinary efforts at analytical and statistical rigor—you just never quite seem to know.

His target subject is teaching—how difficult it is to predict the success of a teacher by focusing on any available statistical predictor.

Yet the value of getting it right is huge. Gladwell points to research that says a good teacher dwarfs the effect of any other factor on a child’s education. The US could overcome its middle-of-the-road global relative performance simply by substituting the bottom 6% of teachers for average teachers.

The problem is, you can’t predict success in teachers, anymore than you can in quarterbacks.

The solution, he says, is to stop focusing on accreditation and criteria. Instead, have the equivalent of apprenticeships, open admissions, tryouts open to all. The good ones prove themselves quickly, as do the bad ones. Find out who they are not by controlling input metrics, but by letting people jump into the water and seeing who can swim.

I suggest that the same problem exists in evaluating suppliers, recruits, and sales funnels. These are all deeply complex, human, messy relationship issues. Good customer, employee and supplier relationships make a huge difference.

But the prevailing business wisdom is that we can analyze and measure our way into defining the right relationships. Think of RFPs (requests for proposal) or recruiting specs.

The motivation behind select-by-spec and hire-by-numbers is complex. It’s part blind faith in “science.” It’s part fear-driven cover-your-butt desire to appear blameless. It’s part fear of interaction with other people.

But whatever, it’s hurting us. In the name of efficiency, many business processes have been employed to bring human relationships to a least common denominator level. The result has been low effectiveness.

Let people mix it up. Inefficiencies can be dwarfed by effectiveness. It’s as true in work as it is in the NFL and the classroom.