Over the last 28 years of my procurement career (yes, I started when I was 12) I have had the privilege and pain of seeing not only procurement but many different types of transformational initiatives succeed and sadly fail. Let’s discuss why procurement transformation can fail.
There are many reasons why procurement transformations fail, but the following 3 keep popping up. It often feels like groundhog day to me (the film is not the actual day in February).
1. Failure to hire the right manager for the job
Too often companies underestimate the leadership and experience required to lead and manage a successful procurement transformation. They will hire an inexperienced and cost-effective resource within their budget to lead procurement transformation.
Many companies intuitively know that the procurement team brings value, most often in the form of savings, but they fail to see the financial and operational implications of hiring an inexperienced executive to build a new team or transform a failing team.
If you hire the wrong executive, you can damage the internal perception of business partners in procurement for a very long time, and once damaged it takes years to recover, often long after that executive has left the company.
The wrong leader can create a negative perception of procurement as a roadblock because they don’t understand the real business imperatives and are too concerned about bashing suppliers.
I’ve seen executives hired or promoted who didn’t even have a procurement background but had a lot of experience in IT or engineering. Not that there’s anything wrong with IT or engineering professionals, they’re some of my closest friends, but success in one functional area guarantees success in another.
Not a fancy ending either, but I digress. OK, there may be short-term savings gains, but pretty soon it becomes unsustainable and the downward spiral is fast. Economical on a small scale and yet wasteful. Great procurement managers are paid exceptionally well, are worth every penny, and pay themselves and their teams 10 times that in their first year and every year thereafter.
2. Failed to build the foundation
Without a solid foundation, companies, departments and buildings fail. What do I mean by Foundation in Procurement Transformation? I am referring to the People, Processes & Systems necessary to build a successful and sustainable procurement team.
The right personshow the right leader is crucial. You need to hire a core team of procurement professionals who are great at sourcing but also great at building strong, trusting relationships. It doesn’t matter how good you are at negotiation, if you can’t develop those critical relationships, those internal partnerships with those will be your advocates, you’re dead in the water.
Without this strong, experienced and dedicated team, even with a great leader, your procurement transformation is doomed to fail.
processes help the procurement pro and your internal partners to know what to expect from each other. It’s like setting “rules of engagement” and creating a toolkit so that every partner experience is positive, repeatable, and sustainable.
I’ve seen great teams thrown together, each drawing on the tools and experience they had outside the company, only to create confusion and dissatisfaction among internal partners because every time they looked at sourcing, the process and therefore their experience seemed different.
Establish a standard methodology and process and you not only help the procurement professional to do their best, you give the internal partner confidence that they are getting what they want and expect from the procurement department.
now systems. Almost without exception, the procurement team has to cobble things together manually due to a lack of systems. Systems are the critical tools required for a lean and efficient procurement department.
I’m not suggesting that you go out and invest in an entirely new and expensive source-to-pay (S2P) system, no, you do need a roadmap for implementing these systems that is aligned with the maturing and evolving team . starting with the most critical; Initiative management and ordering systems. For many, initiative management (or project management) is a spreadsheet of ALL the initiatives that the procurement department is responsible for.
It helps you track and prioritize the most critical projects and balance the workload across the team. Beyond the spreadsheet, I’ve used Salesforce, Ariba, and others, and all are easy to configure to manage sourcing initiatives. An ordering system is also a basic and fundamental tool that is of vital importance.
You need a tool with a front-end requisition component (shopping cart) and workflow approval so that the functional manager and finance department can approve the orders. Ariba, Coupa, and others all have great PO tools, in fact the entire suite of S2P tools, but there’s no need to implement them all at once. Start with the most important ones, build your roadmap, and implement new tools as needed.
Note that you’re not just implementing tools from your ERP system that finance most often mandates just because it’s part of the software suite. This is absolutely a recipe for failure. Without the right tools, you’ll end up hiring an army of procurement people who offer no other value than letting orders walk around for signature.
3. Failure to look beyond savings to procurement value
This is very controversial among procurement pros. Yes, we absolutely can and will save companies money, it’s a key indicator of procurement value proposition (PVC) and return on investment (ROI), but it’s not the only value procurement professionals bring to the table.
I absolutely cringe when I hear business partners talk about procurement pounding suppliers. It’s offensive and devalues what we’re really capable of. The best procurement professionals don’t pound away at suppliers. They engage in fact-based negotiations to get the best competitive market price.
When I go into a negotiation, I usually have the answers by the end of the book. As?? “Benchmarking” or “Should Cost” analysis. Banging a supplier in the dust does not build a strong, reliable, and trustworthy supplier relationship. You’ll either make it up on the next deal or go bankrupt from all the hammering. That doesn’t help anyone.
Not all supplier relationships are the same. They’re not all partners, despite what many will say, both on the supply side and within your own organization. More on supplier governance in a future post. The sole focus on savings also impacts team morale. Procurement professionals reach a point after sourcing and negotiation where savings stagnate or diminish until the next negotiation cycle or by expanding your managed spend.
Putting all the value in the savings bucket is short-lived and unsustainable. Executives who continue to push procurement pros to focus short-sightedly on savings risk losing truly great team members as they become demoralized and disillusioned.
Savings aside, procurement professionals who are experts in procurement and negotiation help identify and avoid risk while creating a blueprint for the project they are working on. A contract should not just be a legal document tossed on the shelf to be forgotten. There should be a clear blueprint for the project, setting out roles and responsibilities, activities, deliverables and outcomes for both parties.
It defines what success looks like and establishes the GOVERNANCE framework required to ensure success. It must not be one-sided towards the customer or supplier, but balanced so that both parties can work together fairly in order to be successful together. This is best for both parties. That’s a good deal.
Finally my favourite; Innovation! What do you say procurement can drive innovation? Absolutely, 100% YES! When procurement teams reach best-in-class maturity, firing on all guns and managing strategic supplier relationships, they have visibility of the entire organization and are placed on the C-suite table.
This vantage point gives them a unique position to align their company’s direction while tapping into the hot bed of supplier innovation. They have a company-wide view of almost everything that doesn’t normally have a department, except maybe our friends in finance. When you have strong, trusted supplier relationships, true partnerships, both sides invest in each other’s success.
When a supplier gives you access to their secret ingredient, the next generation of whatever, it’s an incredible opportunity to capitalize on that innovation and outperform the competition. This is intoxicating stuff. What shopping dreams are made of!
Procurement, supply chain, strategic sourcing, vendor and contract management done right can be a significant competitive advantage for a business, positively impacting EBITDA, enabling critical project success, managing risk, capturing innovation, and achieving market-competitive pricing for reinvestment in your business , that’s what purchasing is all about.