In recent discussions with a wide range of SMEs, not for profits and charities, it is quite surprising how fragile their buying and procurement operations appear to be. Edgar Allan Poe suggested that:
“believe only half of what you see and nothing of what you hear”In this article, we tell you what we have seen and heard, but somewhere in our discussions lies the basis of a very good piece of research work for a budding academic.
If you engage in discussions on procurement technology with large corporate purchasing teams, it is not hard to walk away with the impression that all is good with the world (technically) in the buying discipline. With often large IT budgets, technology supplying suitors who seek those investment levels and associated profits will have an array of integrated tools that can deliver a wide range of great outcomes. It is hard not to feel that all is OK with the world.
However, as you move down the company size curve (and occasionally) in the larger companies, what we see is a series of electronically glued together spreadsheets, paper filing cabinets and buyers’ synaptic channels retaining all of the supplier business knowledge accumulated from often extensive interaction with the vendor base. This interaction could also cover many years’ experience.
From many years’ experience in this domain, we tried to synthesise what we think are the 5 key steps or actions a CEO should take in ensuring they better procurement results. There are many – and we will expand on these in later articles. Let’s start with the bigger picture:
Step 1: A good procurement or buying team should be able to tell you (at a minimum) who the organisations top 20 vendors are, how much has been spent with them over the last three years - and what they supply. The rationale for this is simple. Most purchasing profile patterns follow the pareto principle. This means that 20% of the vendors consume around 80% of the spend. Often the top 10-20 vendors will consume a considerable percentage of that 80% of spend. If the team can’t produce that report – how do you know you are managing the right vendors? We will cover this is more detail in a later article.
Step 2: Out of that volume of spend, how many of those vendors actually have contracts in place (of some description)? If these are mission critical suppliers to the business operation, contracts are good safeguards on cost, continuity of supply and quality. Do the contracts have schedules pricing tables? If not, why is the contract in place?
Step 3: When was the last time the invoices were checked against the schedule of agreed pricing? (now the danger of no pricing schedules becomes evident!). We meet a range of companies who vaunt the fact that they are “purchase order driven” – however, we still conduct a wide range of analyses of data where contract pricing and invoice costs are remarkably different. It’s a simple question – do the invoices comply? It’s often at this point we hear the “it’s a payables issue”. No, it’s a procurement issue.
Step 4: What performance indicators are in place? Are they the right KPIs? This is an important element as often there are no measures in place – or, created by the procurement team who will set the standard quite low - and then significantly fail to achieve them. A good KPI is easy to understand and relevant. Be aware that savings in some business sectors aren’t achievable savings – it’s often merely a constant effort to keep rises in check. Be precise and understand the measure.
Step 5: Measure innovation. Many procurement teams often appear to be victims of circumstance (no budget, draconian IT manager etc). Whether the procurement team is managed though finance or is a separate team will need some careful discussion. Procurement is often seen as the poorer cousin if they are embedded in finance. It means that they simply get the accounting system as their platform. Of all the steps, this is the most important. Over the last ten years costs for great procurement technology have dropped – there are cost effective supplier relationship management tools (with quote/bid technology), self-help spend analytics, contract management, low cost entry e-procurement…the list goes on. IT managers often lay claim to be able to “do that internally”. The truth is that vast amounts of time, effort and money are wasted on IT teams delving in to specialised technical domains and failing to deliver – blaming business staff for the issue when the project implodes. Sadly, the same excuse has been used for almost 30 years – and it still survives. Set a management measure, create a list of useful procurement tools, review findings, costs and potential – once a quarter, one capability. Many procurement teams are simply being left behind. As for the IT manager, make them formally bid for the work and hold them to the price. Every day they delay on failing to deliver is money lost and cost incurred.
But is it all doom and gloom? No…not in anyway shape or form. However, large budgets are not a prerequisite for a successful procurement team. However, curiosity and willingness to engage technology vendors is a key management skill.
Our view is that for SMEs, the cost of accessing technology used by larger corporations is dropping rapidly.
The key failing is lacking the drive to leverage it.