Matters arising

Autumn 2011

Despite the pressure to cut costs, procurement organisations still face opposition to initiatives to channel indirect spend through preferred suppliers. Nick Martindale asked Carrie Ericson how to tackle this thorny issue

 

How big an issue is a lack of compliance in indirect spend categories?   
It’s more of an opportunity than a problem. There’s a chance for procurement to deliver greater value by driving standardisation to existing contracts through preferred suppliers, on the assumption that those contracts and the vendors that are in place meet the business needs at the right level of quality and within a competitive pricing structure.

Is this a major focus for procurement? How does it compare to the other tools they have at their disposal to add value?
It depends on the maturity of the procurement organisation. Unless it has quality contracts with preferred supplier agreements in place, CPOs can’t focus on compliance because they can’t force someone to buy something that’s not going to meet their needs. For those less mature procurement organisations, the focus should be on vendor identification, supplier selection, strategic sourcing and contract observation.

More mature procurement organisations, such as those in some of the consumer products or pharmaceutical companies that have been doing this for quite some time, are spending a lot of time looking at end-user compliance and also at supplier relationship management because once they’ve identified who the right suppliers are, they might want to do some joint process improvement to drive shared benefits.

Where are the main opportunities for procurement to deliver value by enforcing compliance with negotiated contracts?
Where you have a category that a lot of different functions within the organisation buy and use, you get a lot more perspectives on which is the right supplier or the right contract. Procurement needs to play an arbitrator role to get all the buyers and end-users of that product or service together to align on what the corporate needs are and put a contract in place that is flexible enough to meet those needs.

Travel is pretty challenging compliance-wise because people can always find a better airline deal or a cheaper hotel and they feel like they’re doing the right thing by the organisation. Office supplies and maintenance, repair and overhaul are huge categories in terms of driving compliance because they’re used throughout the organisation in every facility and there are often local vendors and suppliers.

Facilities management is another huge challenge, partly because of the range of users, but also because of the vendor fragmentation.

Where there is a unique business function managing the vendor, such as IT or marketing, compliance is not as big a challenge. The challenge with those categories is getting those functions to agree that procurement can play a role in setting up those supplier agreements.

Why is there so much opposition to using preferred suppliers in some organisations?
If the procurement function in the organisation is just not that mature, the preferred suppliers may not meet their business users’ needs because they weren’t set up with these in mind. In a mature organisation where there’s been plenty of due diligence of vendors, the contracts and the service level agreements are good and the quality is competitive, then the pushback is often just an issue of control. Sometimes users understand that it’s a good contract for the company, but think they need something a little bit different for their own needs.

Then there are local business relationships that have been built up over a long time that are really difficult for end-user to sever, especially where they’re in small communities. A final one is the nuisance factor: for each individual business unit that has to make a change it may not involve a
lot of spend, yet procurement is asking them to go through a whole transition programme and learn a new catalogue system and take on board a new supplier. They may not have time
for that.

How can procurement go about driving greater compliance?
Having a broad compliance initiative across all contracts and preferred suppliers is risky because it assumes that all the contracts and preferred suppliers procurement has in place actually meet the business users’ needs. What makes more sense is to drive up compliance to a spend threshold so if people are going to spend more than a certain amount they need to get procurement involved and procurement can then make sure it’s contracted properly and negotiated correctly.

Once procurement is confident these initiatives meet the end-users’ needs, because the end-users have participated in the specification requirements and vendor selection, CPOs should measure the benefits and where people are not complying they can have conversations at the executive level as to why that is. In some cases, it might be the right thing because there was an exception, but where it’s not it becomes a teaching moment. That compliance dashboard just grows over time as more initiatives come into the pipeline.

What other obstacles are procurement likely to face?
The visibility into what’s going on is a huge obstacle. Much of the data CPOs can get their hands on is historical and the money has already been spent. The biggest challenge for the CPO in driving benefits to the bottom line is influencing that spend before it actually occurs, especially where the business user is happy to do the right thing and it meets their needs but they just don’t know how to do it.

Beyond technology, where CPOs sometimes struggle is by going to the stakeholder and talking about procurement. CPOs really need to talk in the stakeholder’s language and understand their issues and then develop programmes that support that from a procurement standpoint, but not necessarily in procurement language. Never mention cost or vendor consolidation.

Compliance is typically achieved through stakeholder alignment and outreach by procurement so it’s incumbent on procurement to translate what they’ve done and the benefits and value they’ve delivered into the business user’s language so they want to comply because it makes business sense. Where it doesn’t then procurement really needs to challenge whether it has the right contract and preferred suppliers in place.

How have things changed during the downturn?
In more mature organisations, the procurement organisation has delivered. They’ve taken on the really tricky categories, contracts or supplier agreements and shown their ability to drive value for the organisation. It’s a combination of facilitating compliance through technology so it’s easier for the end-user to do the right thing and procurement gaining credibility throughout the organisation, so people recognise that it’s not just about cost savings and there is an interest in quality.

Would you expect this to become more prominent in the next few years?
Yes, it will need to because there’s more risk involved. That became pretty evident in the recession in terms of suppliers going out of business. Procurement organisations that have the right sourcing programmes and contracts in place are now working with suppliers on performance management and relationship management to drive better value. More strategic relationships with suppliers will end up with greater compliance just because of the mutual knowledge of each other’s business needs.  


☛ Carrie Ericson is vice-president, procurement and analytic solutions, at AT Kearney, based in San Francisco