Cutting edge

So often the benefits of automation are described in terms of headcount reduction. I’ve worked on enough projects to know that any cost savings achieved by cutting heads is dwarfed by a well executed procurement driven cost reduction programme. The starting number is bigger, the regulations around it are much lower so the speed and value of delivery are much greater.

A recent article by Harvard Business Review links automation to other benefits such as better data accuracy, improved compliance, reduced risk and, most interestingly, greater insight. By releasing people from mundane and repetitive tasks while arming them with data that their stakeholders really value, it claims that procurement can become a strategic function.

But what does “strategic function” actually mean? For me, it means that procurement are invited to shape the agenda, their views determine the outcome and ultimately are considered an essential to creating an organisation’s competitive advantage. Now wouldn’t that be nice!

Life is really simple

“Life is really simple, but we insist on making it complicated.” As true today as it was when Confucius said it two and a half thousand years ago.

Two recent articles about procurement claim that complexity is the main challenge for today’s Chief Procurement Officer (CPO).

The highly regarded writer, Peter Smith, lists some of the subjects CPOs are expected to have mastered today that weren’t considered important a decade ago. The Rana Plaza disaster put modern slavery and health and safety on the agenda. Climate change, deforestation and use of plastics are as difficult as they are topical. And we should not forget economic and political issues like the China–United States trade war and Brexit (as if we could).

The recently published Deloitte Insights splits complexity into two categories: “Bad complexity” introduces risk, hampers procurement performance and should be eradicated; “good complexity” can be exploited to expand procurement’s influence beyond the traditional services of sourcing, purchase to pay and contracts.

Both articles see digital transformation and the appropriate use of technology as the only way to master this complexity. There is no other way to manage large volumes of data across such a diverse range of subjects. Digital transformations requires significant investment from the CPO and the organisation at large. Unfortunately, life is not going to get any simpler, so it’s better to invest sooner rather than later.

Chasing a jet plane with a horse

Given the size and complexity of procurement data sets, it is often difficult to identify exactly where it is wrong and to explain it succinctly to people who are senior enough to hold a big enough budget to get it right. A recent article in Supply Management answers the question why clean data is essential. It points out that the move to cloud-based technology as a “once-in-a-generation” opportunity to cleanse data. The opportunity is to address the different types of data, data silos, non-standard interfaces for accessing information, quality and duplication are all issues, for example, multiple versions of the same supplier in different legal entities.

There are two ways to address the problem: cleanse existing data, which is typically done by the team affected; or invest in improved technology or processes to prevent new sources of unclean data.

A more interesting question is why organisations continue to muddle through with inaccurate and incomplete data. I think the answer is that clean data requires more time and money than many organisations are prepared to invest. To overcome this barrier, organisations should treat cleansing data like any other project and apply an enterprise grade approach.

  1. Create a business case and continually review it, and if necessary, terminate the parts of the project that no longer meet the criteria
  2. Set up an organisation to support the project including a sponsor
  3. Manage the project in stages and learn from experience

To ensure there’s enough resources, the project must prioritise the parts of the organisation’s data – procurement, production, customer, HR and finance – that offer the greatest return on investment. Anything less will feel like chasing a jet plane with a horse; you’ll never catch up, because the data is constantly changing.

Number crunching

In the race to implement the tools to capitalise on the rapid expansion of available data, we sometimes forget why we are bothering. It’s not because we like looking through thousands of lines of data. Or because we want people to complete fields with data that they think is irrelevant. It’s because we want to understand the world we live in so that we, the humans, make better decisions.

Procurement technology and data is a familiar subject to regular readers of this blog. I wish to return to it now to explain how to approach. With the help of the IBM business analytics blog I’ll describe each stage and show how each step builds on the output of the previous stage.

Before going further, we should take a moment to recognise the place of humble spreadsheets in the history of business software. Spreadsheets are the original killer app because they are easy to use and ubiquitous. They are, however, disconnected, siloed, and ungovernable which means they are not reliable, and they cannot scale effectively. If procurement really wants to make the most of big data then an enterprise-grade approach is requires. Data scientist should be involved at each stage of the process and use dedicated, connected tools that help collect, prepare, analyse, adjust and present data to decision makers.

Planning analytics What is our plan?

It all starts with a plan. Whether it’s the corporate plan, a category plan or next year’s budget. It requires an understanding of past performance, identification of deviations from the norm (plan vs. actual), evaluation of possible scenarios, prediction of likely outcomes, and assessment of risks and constraints.

Descriptive analytics What happened?

Now that we’ve got a plan, we want to know what’s happened. Descriptive analytics use two or more historical data points to illustrate a trend, for example, the spend on IT contractors in 2017, 2018 and 2019.

Diagnostic analytics Why did it happen?

Diagnostic analysis takes the descriptive analysis, adds third party data and provides one or more explanations for the changes. Continuing with the example of IT contractors, agencies that engage contractors in the public sector – rather than the personal service companies that employ the contractor – became responsible for applying IR35, the United Kingdom’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment, from April 2017. Some IT contractors in the public sector found their take home pay cut significantly while they were expected to do the same work. Many terminated their contracts in March 2017 or declined renewals and looked for work in the private sector companies that were unaffected by IR35 at the time. While demand remained the same, supply increased leading to a decrease in day rates in the private sector.

Predictive analytics What will happen next?

Predictive analysis takes diagnostic analysis and applies it to the future. IR35 is going to be introduced in the private sector from April 2020. We are likely to see a couple of different outcomes: some IT contractors will look for permanent roles while others will try to negotiate higher day rates to offset the greater tax burden. This will put private companies under pressure but supply and demand will stay the same so there will be no economic reason to increase day rates.

Prescriptive analytics What should be done about it?

Prescriptive analysis takes all the previous analysis and suggests actions to achieve certain outcomes. One of these outcomes might be to reduce the cost of providing the current level of IT support. One suggestion would be to offer IT contractors who have been with the organisation for a long time the option of a permanent role at a lower overall cost (pay and benefits is less than the day rate). It might be to outsource more of the IT support and additional tax liability to a third party. Finally, it might be to seek IT support from outside UK thereby avoiding IR35 altogether.


The number of organisations using each stage – descriptive, diagnostic, predictive and prescriptive – decreases sharply. As the value of later stages becomes more apparent and easier to achieve, we will see more organisations using diagnostic, predictive and prescriptive analytics. Afterall, as the British philosopher Carveth Read said, “It is better to be vaguely right than exactly wrong.”

6. Window on managing suppliers

The cultural change at Microsoft has been well documented, partly because everyone knows
the brand and partly because the change has been so dramatic.
What can procurement learn from this most famous of case studies? In the sixth in the series
of blogs about change management in procurement, I consider the cultural change at
Microsoft and what it can teach us about managing suppliers.
There are many anecdotes about Microsoft, the personal computer software company under
the leadership of Steve Ballmer, CEO from 2000 to 2014. The culture was highly competitive
and at time ruthless. In an interview with the Chicago Sun-Times early in his tenure in 2001,
Ballmer called Linux, an open-source operating system and popular Windows alternative, “a
cancer that attaches itself in an intellectual property sense to everything it touches.” This was
at odds with many Microsoft staff who viewed the open-source concept, or the idea that
software should be shared publicly for others to use, as vital to collaboration and the key to
technological progress.
Microsoft became the butt of jokes, laughed at for missing out on mobile entirely, as well as
its clunky hardware, talking paperclips, and susceptibility to viruses and spyware. The share
price also suffered.
Fluctuation in the technology sector are more extreme than many other sectors and
Microsoft’s dominance, like any other organisation, was only temporary. Procurement
professionals often feel that they are the preferred buyer of a supplier’s goods and services,
but this is rarely the case and circumstances can change quickly.
The surprise appointment of Satya Nadella 5 years ago marked a dramatic change in
Microsoft’s approach to business and culture. It shifted away from software licensing to
cloud based solutions.
Central to the new CEO’s world view was the growth mindset, the
belief that skills are improvable and they aren’t set in stone. Nadella wanted his company to
become one of “learn-it-alls,” not know-it-alls. People needed to see themselves, and the
organisation, as more fluid entities. The focus was on improving, not proving, themselves.
Although the leadership team established a long list of principles, they recognized the
neuroscience research which shows that humans have an extremely hard time remembering
exhaustive list. They shrank it to shrink to just three, two-word phrases: “Create clarity,
generate energy, deliver success”.
One of Nadella’s first announcements was that Microsoft was going to release a version of its
signature software suite—Microsoft Office—on the iPad, bucking Microsoft’s reputation for
not collaborating with rivals. As the keynote speaker at Salesforce’s Dreamforce conference
two years later, Nadella used an iPhone during a product demo, a sight that would’ve been
unimaginable in the Ballmer era.
Since taking over as CEO five years ago, Microsoft’s share price has tripled. Last November,
its market capitalisation briefly passed Apple’s, temporarily making Microsoft the most
valuable company in the world.
Many procurement professionals are protective over their organisation’s intellectual rights
and are wary of collaborating, especially with competitors. The Microsoft case study does not
suggest that buyers should ignore the value of their organisation’s intellectual property, but it
does show that having an open mind, exploring opportunities and taking some chances can
have a positive benefit on the bottom line.
These days all the cool kids may still have Macs, but Microsoft, under CEO Satya Nadella,
has turned a corner. Procurement can do the same.

On time, on budget

Why does a task always seem to take longer than you think it should? It doesn’t matter if it some DIY at home or the implementation of a new IT system at work, it takes longer than everyone expected. Procurement projects, whether that’s getting a purchase order approved or sourcing a new product, often suffer the same fate.

The planning fallacy, first proposed by Daniel Kahneman and Amos Tversky in 1979, is a phenomenon in which predictions about how much time will be needed to complete a future task are under-estimated. The planning fallacy is one of the most common and consistently demonstrated cognitive biases.

In the fifth in the series of blogs about change management in procurement, I consider the planning fallacy, why it occurs and what we can do about it.

There are 3 reasons for the planning fallacy: optimism bias, coordination neglect and procrastination.

  • Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Examples include buyers who think they are less exposed to price increases and project managers who think they are less inclined to go over-budget.
  • Coordination neglect exists when organisations divide a task and then fail to integrate it effectively. This is as a result of many factors including inadequate communication (lack of a common language and lack of perspective taking), partition focus (an emphasis on dividing a task and to do this quickly which results in inadequate planning) and component focus (people focus on a particular task and have narrow functional specialties).
  • Finally, procrastination arises do a lack of impulse control, that is, we do what is more instantly gratifying. Unfortunately, the digital communication revolution and the way it is designed to distract us make procrastination more likely.

So how can we avoiding or minimise the planning fallacy? There are 3 ways:

  • The first step is to recognise that the planning fallacy exists. When a new project is presented that requires procurement input, we should recognise that the presenter has probably under estimated the cost and overestimated the benefits. This is called strategic misrepresentation. All though this may sound like we are calling the presenter a liar it is common among all presenters of new projects so the only way they can get their project noticed is by following everyone else. To avoid any mudslinging, it is advisable to have a record of previous projects so that we can see the level of strategic misrepresentation in the past. The UK government have a green book which contains data about public projects and have found that they are typically 40% over budget. Now I must be clear, I’m not saying that we should give contractors 40% more money. We must draft contracts that incentivise contractors to meet the original target and construct liquidated damages that enable us to claw back a representative proportion of the over-spend.
  • More time should be given to effective planning. Procurement have a key part to play here by ensuring that sufficient time is allowed to develop the scope of work, conduct the negotiations and finalise the contract.
  • Finally, more resources should be given to communication across the team. Again, procurement have a key role. Procurement can help with translation, for example, where engineers can’t talk with marketers and where suppliers can’t talk to cost centre managers.

The planning fallacy is real but we are not helpless. No one wants to tell the boss that it’s going to cost more and take longer but she’s going to find out eventually. It’s better to be the trusted advisor that is proved to be right that someone who’s seen to be part of the problem.

4. Beating the odds

The failure rate of mergers and acquisitions is well known. Study after study puts the failure rate of somewhere between 70% and 90%. Responsibility rests largely with poor change management, that is, a failure of leadership, communication or planning.

In the fourth in the series of blogs about change management in procurement, I consider the role during a merger. I have led the procurement activities in a merger for a number of clients and follow the planning, transition, optimisation (PTO) methodology. In my experience, procurement is uniquely placed to deliver the lion’s share of the benefits including cost reduction. Procurement savings are greater and can be delivered more quickly than those from, say, financial re-engineering or organisational design.

A merger is an agreement that unites two existing companies into one new company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share.

There are two types of mergers: horizontal mergers involve companies with similar area of work e.g., Chevron and Texaco; and vertical mergers involve companies with diverse area of work e.g. AOL and Time Warner. From a change perspective, vertical mergers are more challenging.

If a merger is seen purely as a financial transaction, then the benefits will not be realised. If it is seen more widely, that is, the union of two different cultures then success is much more likely. Trompenaars and Hampden-Turner’s model of national culture differences is a framework for cross-cultural communication applied to general business and management. The model has seven dimensions that can be equally applied to companies in a merger or the buyer and supplier in supplier relationship management (SRM). It can help the leaders of both companies involved in the merger face the challenges such as cultural management, stress management, redundancies, organisational change, resistance to change, job insecurity, talent drainage and low motivation.

There are several models of the change process include Kurt Lewin‘s which suggests 3 stages: The first stage is unfreezing the organisation’s existing culture by discontinuing current practises, attitudes and behaviours. The second stage is transition which basically involves teaching the work force new concept like category management or the use of new technology. And the final stage is refreezing the culture by reinforcing new practises, attitudes and behaviours once the change was implemented.

Effective change management is critical to any merger. Procurement and supply chain is uniquely placed to deliver the synergy savings. Combining the two means that companies have a much better chance of beating the odds and delivering a successful merger.

3. It’s the people, stupid

Implementing new systems is fraught with problems. In a recent survey almost half (48%) said the SAP project failed to achieve their business objectives. So why do organisations invest so much in these projects when they deliver so little? And is there are better way?

In the third in the series of blogs about change management in procurement, I consider the change activities required to implement new purchase to pay (P2P) and source to contract (S2C) solutions. Traditionally, most procurement systems have been implemented as part of a larger enterprise resource planning (ERP) system like SAP or Oracle, however, the market is changing with specialist like Coupa, Curtis Fitch, Ivalua, Jaggaer (Bravo Solutions) and Proactis offering modular systems focused on procurement’s requirements.

I have led several implementations of enterprise wide solutions (SAP, Oracle) and specialist solutions (Ariba, Curtis Fitch). If we assume the basics are in place, namely, a robust business case, an implementation plan based on best practice and an adequate budget, then I encounter 3 common problems:

  1. People should be at the heart of any change. The first stage of Kotter’s 8 stage change model is to establish a sense of urgency so that “a majority of employees, perhaps 75%, of managers overall, and virtually all of the top executive…believe that change is absolutely necessary.” This may sound like a very high bar, however, the same people who believe that change is absolutely necessary will be asked to attend briefings and training courses and will eventually use the system every day. It is better to share information early, even if is going to change, and listen to people’s concerns before telling them the answer to all their problems!
  2. Effective and efficient processes offer competitive advantage, not software. Adam Smith, the grandfather of economics, opened his seminal text with a description of the processes in a pin factory (An Inquiry into the Nature and Causes of the Wealth of Nations – 1776). More recently, Peter Drucker, the management guru, explained the benefits of simplification and decentralisation of processes in General Motors (Concept of the Corporation – 1946). A contract for a software solution from SAP does not, in itself, offer any benefits. And taking a manual tender process and simply automating might remove a few key strokes but will not deliver much benefit. All too often, programmes are described as systems implementations and lead by IT. I believe they should be described as business transformation programmes and lead by the people who are most affected.
  3. Every system implementation plan includes a phase for data migration, however, many organisations fail to recognise the volume of data that is required to power ERP systems and the need to structure it in such a way as to drive compliance. It doesn’t matter how good your P2P process is if requisitioners have to trawl through a list of thousands of suppliers to find one they want. If a new system is needed then it stands to reason that the data held in the old system needs to be gathered, cleansed and enriched before it is migrated to the new system. Unfortunately, improving data is time consuming and requires scarce resources. Managing data well has generated fortunes for Amazon, Facebook and Netflix. Every systems implementation should value process and data equally and follow Carly Fiorina’s matra, that is, “the goal is to turn data into information, and information into insight”.

A new IT system is no silver bullet. It should be seen for what it is, a series of configurable workflows and reports. If organisations want to achieve the benefits of  business transformation then they should invest in engaging with the people affected, design effective and efficient processes and structure the data in a way that makes being compliant easier.

2. Changing source

The outcome of strategic sourcing invariably involves some change. Introducing a new supplier, for example, or offering a new range of products or outsourcing services all impact day to day operations. Where there is significant disruption, change management can be as important as negotiation.

In the second in the series of blogs about change management in procurement, I consider the change activities required in sourcing projects. Research by Burnes showed that two thirds of change management projects fail. In my experience there is no reason to believe that strategic sourcing projects are any different. In this blog I’m going to look at the strategic sourcing process, ways to assess the impact of any change and approaches to communication.

There are several strategic sourcing processes with anything from 5 to 12 separate steps. My favourite is A T Kearney’s 7 steps for sourcing information products. Change management is mentioned in a couple of steps:

  • Step 1: Profile the category, understand needs analysis: “You should … interview current users to develop a thorough understanding of their needs for the product, their view of the suppliers’ performance, and any enhancements that they would like to see in the product.”
  • Step 6 Integrate suppliers: “If you have decided to work with a new supplier and/or to discontinue an old one, you will need to identify any transition issues, consider organisation implication and any required changes, create new processes and procedures if necessary create a transition /implementation plan and communicate the changes to your users.”

But how do you “identify transition issues, consider organisation changes … and communicate the changes”?

There are several evaluation methods but the most popular is the 7-S model. As the name suggests there are seven interdependent element which are categorised as either “hard” or “soft”.

“Hard” elements are easier to define and management can directly influence them: strategy (the plan devised to maintain and build competitive advantage); structure (who reports to whom); and systems (the day to day activities and procedures that staff members engage in to get the job done).

“Soft” elements are less tangible and more influenced by culture. These soft elements are as important as the hard elements for the organisation to be successful. Soft element include style (of leadership); staff (type and number of employees and the way they are recruited, trained, motivated and rewarded); skills (the actual skills and competencies of the employees working for the company) and shared values (or “superordinate element” , that is, the core values of the company that are found in the corporate culture).

The model states that these seven elements must be aligned and mutually reinforcing for the organisation to perform well. Take, for example, replacing several hotel, flight and car rental suppliers with a single travel management company (TMC). A new expenses policy (strategy) and approvals hierarchy (structure) can be embedded with the TMC to provide a more robust controls framework. New processes (systems) will be required to channel employees to the single supplier and then to the most cost-effective travel arrangement. Staff will need to be trained on the new policy and processes (skills). Given the emotive nature of travel, support from the organisation’s leaders will be critical to success (style). Finally, the approach must be aligned to the organisation’s shared values, so making everyone fly on Ryan Air will probably back fire.

Now that changes have been identified, how should you communicate these to the organisation? There are several factors to consider including the structure of communication, target audience and method.

There are many ways to structure message, but the 3-step approach works well for introducing new suppliers:

  • start with “coming soon” – “We have selected a new TMC to replace supplier X, Y and Z”
  • followed by “save the date” – “The new TMC will go live on 1 Jan”
  • finally, “go live” “The new TMC went live today so if you have a travel requirement click here”

The message should be tailored to the audience. Travellers, for example, need details of the supplier, scope of work, service level agreement and where to get help. Approvers, however, only need to know that something is changing.

There are several methods of communication and include:

  • web-based communication – one of the lowest costs methods but relies on internal stakeholders actively looking for information (pull communications)
  • email – another low-cost option but you can’t rely on recipients to read their email (push communication)
  • video and telephone conferencing – enable people in different locations to interact
  • face-to-face meetings: enable the most interaction and should be supported by a presentation to ensure consistency
  • reports: used to drive compliance

The best approach is a combination of all methods so that as many people as possible receive the message in a way they find easy to understand.

Poor compliance to new procurement processes is common and arises for many reasons. The route cause is a lack of clarity about processes and inadequate training and communication. If procurement wish to realise the full savings potential then investment in change management is essential.

1. Change is the only constant

Following the success of last year’s series of blogs taking an in-depth look at procurement technology and data, I wanted to follow up with a similar series on change management. For procurement technology and data to bring about a paradigm shift in procurement performance, organisations will have to provide excellent change management.

Organisations today perceive themselves as less and less stable, and more as a work in progress undergoing continuous change (Burnes, 2009). The frequency of mergers and acquisitions, new technologies, product innovations, all contribute to the continuous state of flux. Procurement often find itself at the forefront of many of these changes so adding some change management tools to the procurement ones make procurement professionals even more valuable.

The good news is that many of the skills required for procurement are also required for change management. Looking at the CIPS core skills programme the key requirements are negotiation and performance management. The Centre for Creative Leadership found that the competencies required for successful change initiatives were communication, collaboration and commitment.

Before going any further, it’s worth defining change management. It is the systematic approach to adjusting and transitioning organisational processes, procedures, strategies, attitudes, functions or technologies from their existing state to one that is considered superior (Burnes, 2009; Cameron and Green, 2009).

Change occurs in three ways:

  • planned change is driven by management and employs a structured approach. Much of the theory of planned change was developed by Kurt Lewin, among others, and lies at the heart of organisational development. It is often perceived as slow and time-consuming producing outcomes that are out-of-date. An example of planned change is the successful implementing a new ERP solution like SAP Ariba
  • unplanned change shares many characteristics with planned change but is initiated outside the organisation. When a government passes new legislation like GDPR, for example, organisation have to change their processes in order to comply
  • emergent change is the continual process of experimentation and adaptation that takes place across an organisation. It is the most important development in change management in recent years. Given the organic nature of the change it is often perceived as inefficient and messy. The manager’s role is to maintain the organisation’s cultural characteristics so that good change can occur. Kaizen, the Japanese word meaning “change for better” is an example of emergent change. A more recent example is Facebook’s mantra for developers, “Move Fast and Break Things.”

Over the next four months I’m going to look at ways change management techniques can support procurement and provide hints and tips for making procurement programmes more successful.

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