Procurement’s 7 Deadly Sins. Part V: Effectiveness Tools Handicap

Current2022Strategy

Jan 25

I often get asked about the tools and investments I have used to transform the different procurement organizations I’ve led. As I pondered, listened, and counseled with industry peers regarding this topic, I discovered the 5th Deadly Sin of Procurement. I have come to call it the “Effectiveness Tools Handicap.”

We often don’t see the ROI we expect on our technology investments. Worse, the shift from Industry 3.0 tools, like spreadsheets and emails, to an Industry 4.0 world replete with Artificial Intelligence (AI), Machine Learning (ML), Robotic Process Automation (RPA) and Decision Analytics tools (to name a few) seems to intimidate us, or at least disintermediate our current processes, so much that we are likely only using a miniscule fraction of the capabilities available to us and for which we are paying.

The reason why is simple: we are not good at managing and measuring the effectiveness of our Source-2-Contract (S2C) process. Which is critical when it come to identifying savings for it is during this upstream contracting process, in contrast to the downstream purchase process, that we have the most opportunity to negotiate value. Moreover, we have had few, if any, tools to measure and manage our effectiveness and even less budget to spend on S2C process management.

Measuring Procurement Effectiveness

Have you ever wondered if your enterprise procurement team was getting the best deal it could on the opportunities presented by the business?

When I refer to effectiveness, I mean beyond the efficiencies sought in transaction processing, it’s got to be about business impact. Impact as defined by your business can be best described as your desired Business Outcomes: Innovation, Digital Disruption Enablement, Savings, Diversity, Sustainability, etc. I addressed part of this gap in my last blog on Stakeholder Centricity. While stakeholder’s needs are a primary business impact, meeting their goals does not inherently mean you’ve gotten the best deal nor achieved all the expected business outcomes. Much like you they are measured on specific goals and the overall business impact typically extends beyond any singular function’s focus, thus a deal goodness must measure all of the relevant desired business outcomes.

For example, you may be helping marketing source TV ads and their priority is creativity and conversion rate. You also must be cognizant of pricing and market competitive terms that they may or may not care about. You bring that knowledge into a negotiation to effectively support business objectives while ensuring that the deal is competitive given market conditions and capture the maximum value.

We add value when we deliver on both the metrics that matter to the business and ensure that the final deal maximizes value for spend. In other words, we can’t just ignore cost controls and savings. In that context, do you have enough visibility on how the deals are getting done to ensure if know your Procurement Team is getting a good deal or not? My answer to that question is an emphatic “NO.”

I’ve struggled mightily with this holy grail of conundrums – balancing the “best deal” construct with business and operational constraints – throughout my tenure in procurement. I have savings targets that the budget owner may, or may not, care about. They have needs that I have to care about to be successful.

After gaining the privilege of leading, and the opportunity to call some of the shots, at several Fortune 500 companies these musings expanded to my team and then ultimately our entire profession. What if my team could get to the perfect set of conditions for the best deal outcomes? What circumstances would need to exist? Are there tools to help create such opportunities? And if so, how much more impactful would my team be? What if procurement could be focused on savings without being a gatekeeper that encouraged business partners to skirt policy and avoid working with us or entering a competitive process?

Challenging the notion that we were limited by existing processes and policies drove some profound insights and actions (which have formed the basis for my Procurement’s Deadly Sins theory) but it was when I looked at the tools we were using and asked if they were the right ones (and being used the right way) that I realized we had a major blind spot. We have some great tools available, but because we don’t invest in technology, training and talent sufficiently to support the upstream Source-2-Contract (S2C) aspect of our responsibilities. as a function we have an effectiveness tools gap. We don’t know how well our teams are using technology investments which frankly handicaps our teams, our performance and our value proposition. Simply put we have an “Effectiveness Tools Handicap.”

In fact, we don’t really measure or report on the effectiveness of our sourcing activities beyond savings. By comparison, we measure cycle time on purchase orders from requisition through supplier acceptance and even payment. We measure total transactions, total spend, whether we are buying on-contract and many other metrics to make sure we spend money in the right ways. However, when it comes to the S2C realm, we don’t always even know how many deals are active, nor have an easy and clear means for the business to request support, much less metrics for on-time performance, or measuring progress against targets at a negotiation level. This limited historical data is only slightly better than the dearth of future looking metrics. We can forget about a pipeline or visibility into how much support the business needs. This is BUSTED.

This is what I call the Effectiveness Tools Handicap – we can’t get better if we can’t see what we are working on and how we are performing at a comprehensive yet sufficiently granular level.

Value Levers CPOs Must Action to Mitigate the Effectiveness Tools Handicap

To Drive Value in Enterprise Procurement, CPOs must action these three value-levers:

Increase the number of sourcing events (throughput) at both the team and individual level.
One part of this is using big data analytics on bids, will get more done, more impactfully and more quickly. Specifically look for sourcing tools that offer advanced optimization but still offer flexible enough cost models to be anything from finished price to a complex cost model.
Also make sure you have the right people working on the right jobs
Sneak Preview: In a future post, I will discuss how Ken Black, Russ Swansen, and Matthew Hamilton collapsed analytics from two and a half months to two and a half days with terrific business results.
Having figured out how to compete more spend you can action more of your tail spend. Traditionally thinking is that this 15-20% of spend (and ~80% of the suppliers). Moreover, common sense says that it is unrealistic to manage given resource constraints and principles of diminishing returns.
I have been known to say that what people think of when we say tail spend is a mouse tail, when we should be thinking about it like a Tyrannosaurus Rex tail. There is a tremendous about of value to unlock in that tail spend.
According to Andrew Bartolini at Ardent Partners, there is roughly a 12% savings opportunity on those tail spend items. Most of us can benefit from an incremental 12% savings. So why are we ignoring tail spend?
Lastly, it is critical to better manage your S2C performance. You should focus on the effectiveness of every sourcing opportunity and stop leakage that you don’t even see. The fix is Effectiveness Tools such as Pierpont Holding’s solution Enterprise Procurement Performance, EP2.

I have personally used these three steps to transform my procurement teams multiple Fortune 500 companies, elevate our function and increase business value. I am happy to help you if you too believe that there is a better way.

Where can you get help?

These issues are correctable with the right application of tools, processes, and team capability building. At issue is that too many of us simply don’t know how. Bill Gates’ wisdom can be helpful here: determine “who has done it well and what can we learn from that.” I believe that among my 30,000 social media followers, the answers are out there.

We now need to get those solutions to the people that are still struggling with problems that someone knows how to solve. These Seven Deadly Sins are fixable, we simply need to get the solutions to the folks that are suffering in silence. When we are done, and when the solutions are deployed, the business world that drives I aspire to be a catalyst for that functional change in industry.

If you think your team is limited by Blindness, 3-5% Savings Fallacy, Three Bids in a Buy Abuse Lack of Stakeholder Centricity, then here is what I recommend you do:

FOLLOW ME on twitter @waltcharlesIII and FOLLOW ME on Instagram @officialwaltcharles
ADVOCATE THESE NEW APPROACHES at your BUSINESS – email me at waltcharlesiii@gmail.com to get help
Continue to READ and SHARE my blog article with anyone in your network that is struggling with any of the “SEVEN DEADLY SINS” mentioned – I still have three to go.
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