PROCUREMENT CAN PLAY A KEY ROLE IN ENSURING YOUR ORGANISATION IS AS AGILE AS POSSIBLE.
The word on everyone’s lips right now is agility. From startups to unicorns, we are conditioned to admire agile traits to reduce costs or accelerate and fuel growth strategies. Some great businesses were built on agile principles, while others are victims of their inability to react where change was needed or to accelerate where the opportunity arose. Agile procurement is now, and it is here to stay.
The startling truth, however, is that for the CFO of the average large business, at least 70% of your agility is out of your direct control. Agile procurement has a key role in helping you bring it back under control for one critical reason:
External suppliers are now 5/6ths of the cost base of most large corporates in UK, US and Europe.
Externalising the modern business means that suppliers are not only the biggest cost line, but by implication also the greatest potential source of productivity, risk, innovation, and growth. The suppliers you choose, the objectives you set them, and how you manage them must therefore be of absolute importance.
And this is where Procurement comes in, the function most closely tasked with identification, selection, and management of suppliers. However, Procurement is often tasked to buy cheaper rather than smarter, pointed at standardisation and price rather than broader considerations of speed, agility, and growth in line with business objectives.
In this article, we look at how Procurement agility can drive innovation and challenge conventional assumptions which are made about its role, namely just driving savings.
Procurement for competitive advantage – speed
Nearly 60% of UK Procurement functions report to Finance, so the keys to a smart cost base, business agility, and growth often sit with the CFO. So…what should you be thinking about?
Competitive advantage used to come from being more intimate with your customer, being more operationally efficient, or being a better product leader, based on Michael Treacy and Fred Wiersema’s three great insights (from ‘The Discipline of Market Leaders’) , and were routes to enhancing your margin over your competitors.
Customer-intimate providers tailored their offering more precisely to the needs of their customer, for a premium. Product leaders could charge more for their new innovative offerings, so making more profit. Operational efficiency meant providers could charge the same or marginally less, but with a lower cost base.
Now perhaps there is a fourth possibility to obtaining competitive advantage: adapting faster than the competition. In particular, can you do three things faster than your peers?
- get new products to market
- respond to evolving customer preferences
- respond to new offerings from competitors
In the first two, you can charge more until your competitors catch up; in the last you limit the duration of competitor profitability.
This is what we mean by business agility. To achieve it, the CFO must rethink conventional assumptions about Procurement and suppliers…
Agility as a means of unlocking supplier innovation
Agility can come from within or from harvesting combinations of smart ideas from outside your organisation, and suppliers are a great source of those ideas. Add up the R&D of your suppliers. And it blows your own R&D budget away, and they have fresh perspectives on old problems. If they bring an idea to you first, and you deploy in conjunction with them, maybe you win.
However, there are two hurdles that go to the heart of this reinvention of how many organisations think about procuring:
- Where are the most innovative suppliers?
- Why would suppliers bring their best idea to you first?
Where are the most innovative suppliers? Not where you may think at first. Big suppliers may make the most noise, but the first to market are rarely large corporates with big marketing budgets. Instead the evidence shows that industry ‘re-shapers’ are the small to mid-sized hungry organisations and according to the OECD, they account for a “disproportionately large share of new jobs”.
Pursuing mid-sized innovators has not been the objective of many large Procurement functions. Traditional procurement ‘category management’ and the pursuit of administrative simplicity have led businesses to rationalise the supply base. Some big banks spending billions of pounds have 100 suppliers to cover 85% of spend. (Note this assumed there are economies of scale in buying from all suppliers; this is certainly not true in service markets – if it was, McKinsey would be the cheapest strategy consultant. It may be that administrative simplicity and the desire for consistency is the driver at the expense of cost.)
However, the pursuit of a simplified supply base is the potential enemy of innovation. Many large companies have reduced their supply base to focus on other large companies. It is not that large suppliers do not innovate, merely the speed at which they launch new products is simply not as fast as their nimbler, smaller competitors.
If you want to harness supplier innovation at the front of the pack, embrace entrepreneurial pioneers who are making the running in new product offerings. And you need to persuade these go-getting suppliers to bring their brightest, shiniest jewels to you first….and not your competition.
To get the newest and most innovative services from an agile start up, you need to get closer to them and have a different conversation to convention. If traditional Procurement has spent the last three years chasing price reduction after price reduction, why would your existing supplier want to turn up and reveal their most exciting innovation to you?
Likewise, if you only select the biggest marketing agencies, young and agile alternatives will not bid. Why should they, when after considerable time and effort, the same old big incumbent is selected. A ‘slow to decide / difficult to navigate / determined to extract every piece of value’ customer is not the first one who innovative suppliers want to sell to. As a result, they go elsewhere and you lose out.
You see, your business has a commercial reputation: fair, firm, hard, soft, impossible to deal with, ruthless to the last penny, friends to big suppliers, – who knows? Your supplier knows. Circumstance may dictate the path you have had to take to here, but going forward you have a choice.
When Finance tasks Procurement solely on cost cutting or measures Procurement exclusively on savings, this changes where Procurement focuses with suppliers and hence your business’ brand as a customer is impacted, and potentially how the supplier deals with you changes. This may make future courses hard to chart because it takes time to rebuild trust and develop a new narrative.
Many big businesses make themselves hard for new suppliers to approach. A remarkable number of large corporates have supplier sections on their corporate website, which do not indicate how to contact the business with a new idea and who to approach. Nor do they highlight their willingness or desire to seek out such suppliers.
This matters when you find the small suppliers who would enable you to move faster, have gone to your competition. I have heard many such stories during my career.
Five lessons for supplier enabled agility
You will need to change thinking – there is potential trade-off between operational efficiency and speed. It can be more costly to run new suppliers’ offerings (though because of diseconomies of scale, they are not always less costly at point of purchase); you may even pay a premium for being first to adopt the offering. The benefit comes from incorporating the advantage of being first. Finance and Procurement need to think how to narrate this and how to track (where possible) value. And all have to be comfortable that there will be more suppliers.
To make yourself more agile (and more attractive to deal with), there are five things to think about:
Declutter: Simplifying your interactions with suppliers is required. Replace long RFIs with many, many suppliers with more focused, smaller scale exercises. Put in place commercial policy and process that will attract smaller suppliers (e.g. simplify contracts and contracting processes. Taking nine months to contract won’t work for the smaller players).
Curiosity: Systematically sharing your problems with suppliers, and asking them how they can help, brings surprising insights
Accessibility: Be attractive, simple to understand, and easy to find. You may decide to have dedicated ‘innovation sherpas’ looking for new suppliers, or a vendor innovation program. You certainly need to have a place on the website that helps guide new suppliers through your processes.
Experiment: once selected, rethink how to bring a new supplier into an organisation and help them navigate. They will need help to be quick if new to you, and will need to be coached if they are not to be smothered by better connected, incumbent suppliers.
Eject: You have to get really good at both removing incumbent suppliers (who will fight tooth and nail) to create the space for those more agile, and also ending experiments with new suppliers when they are not working
These are components of a rebranding exercise to appeal more to the suppliers whose products / services are evolving at pace, and whose adoption can make a difference.
Agility matters, and embedding it in your corporate DNA is challenging. You are asking your organisation and your people to change. You have to ask your suppliers too. There will be tough decisions to make; you will make mistakes, you will need to course correct. And when you do, the 5/6ths of your cost base will finally be working for you and with you.
Original article featured in Financial Director.