Nudge not fudge

A friend of yours, Kate, recently started a new job as a team leader in the head office of a global organisation. She used to work for a small business where she was responsible for all aspects of procurement from negotiating prices to implementing contracts. In her new role as team leader, she will be responsible for placing purchase requisitions and expediting orders. Although this is only a small part of the role she used to have, the value of transactions will be much higher and she’ll have to liaise with lots of different stakeholders.

In the first week of her new job she had a meeting with William from Procurement who explained that the procurement policy states that preferred suppliers should always be used and if suppliers submit an invoice without referring to a purchase order number then it will be returned unpaid. Kate’s team are running low on stationery and there is an urgent requirement for a new online brochure so when she gets back to her desk she logs on to the procurement system to create her first purchase requisitions. She finds the details for 3 preferred suppliers for stationery and a long list of market agencies. The marketing agency she used in her last job is not on the list but she knows that they will be able to deliver quickly. Should she follow William’s advice and contact some of agencies on list or ask the supplier she knows to start work and sort out the purchase requisition later?

William is what behavioural economist like Richard Thaler call a choice architect. William is responsible for organising the context in which people make decisions. By selecting preferred suppliers, he is limiting Kate’s choice. A nudge is any aspect of the choice architecture that alters people’s behaviour in a predictable way. If William had highlighted one of the 3 stationery suppliers he would nudge Kate into selecting that supplier over the other 2.

William is also a choice architect for marketing agencies, however, the situation is different. By providing too many options and insufficient information he has made it difficult for Kate to make a choice. The procurement policy states that preferred suppliers should be used but it’s very difficult to select the best one to do the work. William has fudged the choice architecture which may lead Kate to use a supplier not on the list. Asking a new supplier to start work without a purchase order means that there will be no due diligence, no contract, a problem with payment and an increase the total number of suppliers which will compound the problem further. How can William nudge Kate into making a better choice? He has 4 options:

1. Select preferred suppliers. William could ask each agency to respond to a request for a proposal (RFP) and select the best ones to become preferred suppliers

2. Select one supplier to be the default preferred supplier. If Kate doesn’t select any supplier then the purchase order would be sent to the default supplier automatically. This supplier would either do the work in-house or outsource it. William could ask the larger agencies offering a range of services to respond to a RFP

3. Provide a brief description of each agency and the type of work they specialise in. William could gather the information by asking each agency to respond to a request for information (RFI)

4. Remove agencies with low levels of activity. William should decide the threshold which may be based on spend, number of purchase orders or number of internal customers

Option “1: Select preferred suppliers” is the best choice architecture for Kate and William. Kate is given clear guidance and has the comfort that she is getting the best commercial arrangement. William is able to achieve his savings target and manage the relationships with the preferred suppliers.

Option “2: Select a default supplier” will have many detractors. Marketing professionals will argue that big agencies do not always offer the best solution for all requirements and procurement professionals will say that better pricing can be achieved from regular competition. Whilst both of these arguments are correct, option 2 is better than the current situation because it prevents Kate from succumbing to status quo bias and engaging the agency she used in her last job. William can monitor the spend with the default supplier and re-negotiate a better deal if spend increases.

Options “3: Provide a brief description” and “4: Remove agencies” will help Kate make a decision. Kate will be able to short-list suppliers based on the description and removing agencies will address the just maximise choices strategy. Unfortunately, neither will help William achieve his savings target or protect the organisation commercially, however, it may be enough to stop Kate from creating a new supplier.

By recognising his role as a choice architect, William creates an opportunity to influence Kate’s behaviour and achieve a better outcome for procurement. William may not have enough time to ask all the marketing agencies to respond to a RFP but there a number of other options which will nudge Kate into making a better choice. Hopefully this example illustrates how behavioural economics can help procurement and where a nudge is better than a fudge.

More of my mess for less

Much has been said about public sector outsourcing since Carillion went into liquidation in January this year, me included. The House of Commons Public Administration and Constitutional Affairs Committee report on the matter, After Carillion: Public sector outsourcing and contracting, published on 3 July 2018 pulls no punches.

So what did I learn from reading the report? Below are some interesting facts and quotes:

“The UK Government spends £251.5 billion per year on outsourcing and contracting.”

“The UK spends 13.7% of GDP on public procurement, which is not significantly different from countries such as Denmark (14.16%) or Germany (15.05%).”

“It is unclear how and why the Government decides whether to outsource a particular service. The Government has a process, set out by the Treasury, to make decisions about how it should deliver services and run projects, including evaluating options about whether and how to use the private sector. However, the Government does not always follow its own process. Moreover, the evidence used to support these decisions is thin or non-existent.”

“The Government has deliberately promoted an aggressive approach to risk transfer to the private sector – often even attempting to transfer risks that the government itself has completely failed to analyse or to understand.”

“Government failures in this area have forced government repeatedly to renegotiate contracts with the private sector. Even in the months since the beginning of 2016, departments have already had to renegotiate over £120 million worth of contracts with the private sector. This reflects poorly on government’s effective ability to let and manage contracts.”

“The Government must improve its skills in the negotiation and management of contracts…These commercial skills cannot be seen in isolation either but must be integrated with other skills such as costing, project management, IT capability and financial planning, along with deep and relevant subject knowledge and expertise.”

“The Government admits that its data about contracts internally is poor…which can lead to blind reliance on what companies tell the government, instead of a genuine exchange of information and a continual appraisal of the contractor’s performance over the lifetime of the contract.”

“Contracting and outsourcing with the private sector is a permanent feature of governments in mature economies across the world and it will remain so, whichever government is in power.”

So if the vast, sprawling organisation that is the public sector wants to improve then it must first find a better way to work together.

5. The future of procurement technology and data

AI, algorithms, bots – familiar terms even if we’re not sure what they do or how they impact our daily lives. For most consumers, new technology suggests lower prices. For most employees, it’s a threat to their livelihoods.

This is the final blog in the series about procurement technology and data. In this blog I consider the future.

Despite implementing a variety of procurement technology solutions, I find little evidence that computers are lowering the cost of procurement or making it redundant. Technology, however, is having a profound impact. For all the improvements in technology, such as P2P, eRFX, and analytics, much of it requires significant on-going investment to load data and a detailed understanding of the way the system works in order to interpret the reports.

This begs the question about the future role of procurement and the nature of developing technologies. RIP Procurement or a new dawn?

The Future of Employment: How Susceptible Are Jobs to Computerisation provides some useful insight that can be applied to the procurement profession. Computers have replaced many jobs that are routine, that is, follow explicit rules. Many manufacturing jobs, like those on a production line, are now done by robots. However, as Google and others have shown with autonomous driverless vehicles, computerisation is no longer confined to routine manufacturing tasks. Despite these advances, Moravec’s paradox still applies. Contrary to traditional assumptions, high-level reasoning requires very little computation but low-level sensorimotor skills require enormous computational resources. As Moravec writes, “it is comparatively easy to make computers exhibit adult level performance on intelligence tests or playing checkers, and difficult or impossible to give them the skills of a one-year-old when it comes to perception and mobility”.

Recent technological breakthroughs are, in large part, due to efforts to turn non-routine tasks into well-defined problems. Defining such problems is helped by access to lots of data. The rules for turning left on an empty British road can be defined easily. Turning right on a dual carriage way at rush hour requires the ability to crunch a lot of data quickly.

Looking at CIPS core skills programme the key requirements are partly knowledge based (know the procurement cycle and contract law) and partly skills based (negotiation and performance management). Even a sceptic like me can see how rules could be developed for some core skills and be delivered at a lower cost by a computer.

The days of the traditional roles in procurement of junior buyer (checking purchase orders), buyer (running tenders), category managers (defining the category strategy) are numbered. The future of the procurement lies in specialisation in three areas:

  • Supplier relationship management – recognising those supplier relationships that are critical to the buying organisation and developing strategies to drive the greatest value from them
  • Analystics – analysing big data, identifying trends and applying them in a commercial environment
  • Technology – identifying tasks that can be defined by rules and using computers to do them

Despite the rise of the electronic messaging and social media, verbal and visual interaction will remain a critical factor is building relationships so location must be a consideration. To prevent these specialisms being outsourced to low cost country economies, local procurement professional must be able to demonstrate that they can manage internal and external relationships better. That means that anyone wanting a role in procurement must have emotional intelligence and grit.

The majority of procurement professionals have experienced considerable change during their careers already. New technology means new challenges but I think the procurement profession is well placed to take advantage of it.

4. Up the Amazon without a paddle

This is the fourth in a series of five blogs taking an in-depth look at procurement technology and data. I started by considering the range of procurement technology that is available. This month I compare data from procurement systems with those from customer systems.

If procurement professionals promise an “Amazon” type experience from their source to contract (S2C) or purchase to pay (P2P) system then they are going to have some disappointed customers. Business to customer (B2C) systems look better and are simpler to use than business to business  (B2B) or enterprise systems. But why?

Earlier this year I completed a project to re-launch SAP for a multi-national telecoms company. Improving the user experience was a key part of the scope. With the help of a large technology consultancy, we spent a lot of time looking user behaviour and mapping process. Insights were used to design a user interface (UI) that was more appealing and would enable a better user experience (UX). To give one example we wanted  to enable the most important tasks, like approving a requisition, to be done easily.

I’m pleased to say all the work paid off and the UX improved beyond recognition but Amazon it was not! So how did we manage to do such a good job and yet still fail to meet the expectations of many of our stakeholders?

B2C and P2P systems may share many obvious characteristics but there are fundamental differences, namely, the type of items purchased, the regulatory framework and the way the systems are designed.

  • Most B2C systems offer products, for example, when I searched Amazon for office cleaning I was directed to a box set for The Wire, the TV series about a drug and murder investigation in US! With the exception of manufacturing, most businesses purchase more services than products. Furthermore, services are harder to define and deliver. Consequently, the core P2P systems has to be able to cater for a much more variation which results in greater complexity.
  • So long as the goods offered on B2C websites comply with relevant consumer legislation (e.g. the Consumer Rights Act 2015 in UK) then no further requirements have to be incorporated. By contrast, businesses have to comply with a wide range of legal and tax regulations which must be built into the system (e.g. general ledger codes are required for financial reporting).
  • Finally, B2C systems are designed to encourage customers to buy, for example, most websites offer to hold your credit card details so it takes just one click to make your purchase. P2P systems are designed to drive compliance to the company’s policies which often include reducing costs.

P2P providers have much to learn from B2C, however, offering an experience like “Amazon” is going to lead to disappointment all round.

3. Data differences

This is the third in a series of five blogs taking an in-depth look at procurement technology and data. I started by considering the range of procurement technology that is available. In this blog I compare data generated by procurement systems and social media.

It seems not a week goes by without another revelation about the use of data. The latest story to hit the headlines is Facebook’s harvesting of personal data. If some of the research is to be believed, “it just takes 150 Facebook likes for psychometrics software such as Cambridge Analytica to know your needs, fears and hopes better than your parents do, and just over 300 likes for such software to know you better than you know yourself.”

And yet everyone in procurement seems to be frustrated by the lack of the good quality spend data and the way it’s presented. This frustration seems to be felt most acutely in organisations that have invested heavily in enterprise resource planning (ERP) software.

So why does personal data appear to be having a much greater impact than spend data? Are Google and Facebook better at handling big data than SAP and Oracle? Or did large organisations realise the value of data a long time ago and consumers and governments are playing catch up with regulations like GDPR?

I think there are a number of reasons: the availability of data, the quality standards applied and the way in which it is used.

Personal data is gathered from a variety of sources: search engines like Google, websites like Amazon, and location based services like Garmin. As more devices like fridges are connected to the internet, even more data will become available. Spend data, however, is only created when transactions are made in ERP systems. These rely on accurate master data on users, suppliers and contracts and high levels of compliance to processes and controls.

When researching this blog I was surprised to learn that “most marketing data is between 10% and 20% accurate.”. Without doubt, Facebook and Google’s data is a lot more accurate but it hard to get concrete evidence, for example, there are claims that Facebook’s gender data is 99% accurate with the caveat that there is “a bot problem”. So is it 99% accurate or not? From a personal perspective, I’m occasionally surprised at the accuracy of online ads but more often bemused at how they ended up in my feed.

I cannot imagine sitting in front of a CFO trying to explain that only a fifth of the spend data presented was correct. Furthermore, I’d expect suppliers responding to a tender to build in a significant risk premium to their pricing. I’m not saying that spend data is perfect. Even investing a lot of time improving the quality of spend data, I often apply Pareto’s principle, that is, 80% of the effect comes from 20% or the cause. But spend data has to give a reasonably accurate picture because budgets and savings targets are often based on it.

Big data has changed much in the world of advertising but John Wanamaker (1838-1922) quote still seems holds some truth: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half”. Big data has also changed much in the world of procurement but for most organisations big improvements are still required. It seems we all face the same challenge but have different ways to achieve it.

2. The chicken crossed the road

On 18 Febuary KFC tweeted: “The chicken crossed the road, just not to our restaurants. We’ve brought a new delivery partner on-board but they’ve had a couple of teething problems – getting chicken out to 900 restaurants across the country is pretty complex.” In the subsequent days, more than half of KFC’s outlets in UK were closed.

Without wanting to pick over the bones of this crisis, I wanted to use this as a case study as part of my series of blogs on procurement technology and data. What went wrong at KFC and can anything be learned?

KFC’s tweet led the media to point a finger at the reliance on a single distribution centre and the logistics provider, however, this appears to be an over-simplification and ignores the complexity of modern supply chains.

Using a single distribution centre in the “Golden Rectangle” between Milton Keynes and Rugby on the M1/M6 is a well-established and proven means of getting products into a network. A lorry that’s loaded up by 7pm in the evening will be able to deliver to anywhere in UK by the morning.

Bidvest, a specialist in food delivery and the incumbent, lost a tender to DHL, the world’s largest logistic supplier.

There are four key components to a supply chain: the processes, the infrastructure like warehousing and transport, the information systems that run it, and the people involved.

Under KFC’s new approach, DHL provided the infrastructure and QSL the software for the information systems. By all accounts, the new supply chain solution came together for the first time on Tuesday 13th February (5 days before the tweet).

Like any complex machine, such as a car, you can test the engine, brakes, air conditioning and they all work. Bring them all together and suddenly one element isn’t working properly with another element and the whole machine stops working.

It is too early to say what exactly went wrong in the case of KFC. Supply Management proposed some generic areas to consider. In time, we will be able to scrutinise the tendering process, how collaboration was established and handover carried out.

Perhaps the most important lesson for now is one about the reality of modern business. Individual businesses are dependent on their suppliers in a way that some find difficult to comprehend. Competition takes place between entire supply chains, each comprising a range of specialist business collaborating to deliver the final product.

Hopefully, this has helped you digest the KFC’s supply chain crisis and brings an end to all the fowl jokes.

1. Introduction to procurement technology and data

“Technology is a useful servant but a dangerous master” according to Christian Lous Lange, the Norwegian academic and Nobel Laureate.

This is the first in a series of five blogs taking an in-depth look at procurement technology and data. I start by considering the range of procurement technology that is available and show what happens when it all goes wrong. I go on to compare data from procurement systems with those from social media and customer systems. Finally, I consider what the future holds.

When considering the range of technology available, it is difficult to find an area of procurement that remains untouched. As the market matures, technology providers are pushing into areas resulting in considerable overlap. CIPS compiled the list below. Although some of the terminology has changed since 2013 I think it still serves as a useful summary:

  • e-commerce; more specifically, e-sourcing, e-procurement, e-purchasing, e-auctions, e-tender, purchasing cards, purchase order systems
  • Marketplaces/business exchanges
  • Contract registers/databases
  • Knowledge portals/supplier databases
  • Business intelligence
  • e-invoicing/e-payables
  • ERP (Enterprise Resource Planning) systems
  • MRP (Manufacturing Resource Planning)/Inventory systems
  • EPOS (Electronic Point of Sale)
  • Bar coding/RFID (Radio Frequency Identification)
  • Intranets
  • Extranets

All this technology generates data. Many procurement professionals ask themselves if technology makes them more efficient? The go on to ask whether the vast quantity of data generated provides any insights that can those be used to increase value to the buying organisation. I will try to answer these questions in the following series of blogs.

My mess for less

WHAT does the Royal Opera House, MoD homes and hospital dinners have in common? Perhaps not much, which may be one reason for the dramatic collapse of Carillion, the construction to services group. On 15th January the firm went into liquidation, jeopardising the prospects of its 43,000 employees, 30,000 subcontractors and the fulfilment of 350 government contracts stretching three decades into the future.

Governments from Margaret Thatcher’s to Theresa May’s have wanted to expose moribund state monopolies to the competition and innovation of the market. This theory might sound very attractive in Whitehall but the reality is somewhat different. I’ve worked for a number of outsource providers and it feels more like government wants to trade “my mess for less”.

Although much of the work seems mundane, it is often difficult to automate and relies on long complex supply chains. This means that cash flow becomes the most critical factor. In the case of Carillion, it was liquidated with just £29m cash and more than £1.5bn of debt, leaving pensioners and creditors with big losses.

Although all the evidence is yet to be gathered, the fact that Carillion funded dividends from the sale of assets in 2017 and the shares have been shorted for longer suggest that there was a failure in management.

The last words goes to Walter Howells who runs Howells Patent Glazing: “Carillion was reviled among subbies. There will be those who are dancing on its grave. They were always late paying, it was always 120 days. You got the impression their accounts department’s job was to delay payment as long as possible.”

GDPR

Data and oil have much in common. Both require pipes, careful temperature control and have the ability to generate vast fortunes.

EU regulators have cottoned on to this and have been busy drafting the General Data Protection Regulation (GDPR). In the UK this will replace the Data Protection Act 1998 and introduce tougher fines for non-compliance and breaches, and give people more say over what companies can do with their data. It also makes data protection rules more or less identical throughout the EU and come into effect on 24 May 2018.

There is plenty of advice for procurement professionals, for example, Supply Management’s article with the eye catching title of When data is breached the CPO will be fired first.

Consumer choice

A recent report by KPMG called Me, My Life, My Wallet provides insight into changes in customer behaviour which procurement professionals will find interesting.

Procurement has two customers: the end customer who consumes the products that their organisation provides and internal stakeholders responsible for budgets. In my experience the end customer leads on new trends with organisations trailing behind. This is based largely on technology adoption – compare the experience of Amazon to SAP or Oracle; or smart watches to spend analytics.

Perhaps unsurprisingly, KPMG found that technology is the biggest single driver of change. Demographics and geography play a part but mostly in the context of technology adoption.

In its relatively young lifespan, the smartphone has grown at a staggering pace, with China becoming a distant leader. The first smart phones appeared in 1995. Today there are more than two billion active devices around the world.  Almost 90% of smartphone users say their device never leaves their side. And more that 70% of Chinese would rather lose their wallets than their mobile phones (probably because their phone is their wallet). The message is clear – if you want your consumer to do something then you have to ensure that it’s mobile enabled.

Homer Simpson once observed that “Every time I learn something new, it pushes old stuff out of my brain.” 4 out of 10 consumers surveyed feel totally overwhelmed with information and avoid it if they can. So if you want to avoid alienating a significant proportion of your customers then think hard about how you engage them and what you say to them.

The report says that “Most businesses have built their operating model based on life event norms, and those are primarily based on the boomer generation that created the mould.” These norms do not apply to generation X or millennials who, for example, don’t regard their first car as a milestone in the way that boomers did. On average, KPMG estimate, millennials are 10 years older than boomers when they buy their first home – and 10 years older than boomers when they have their first child. Even boomers are affected – although they are the first generation to retire on defined contribution pension plans and are living longer, they are haunted by what KPMG calls FROOM (Fear of Running Out Of Money). Millennials are putting an unexpected strain on family finances: 22% identify their parents as a source of income. Is your operating model fit for an era when millennials have the most spending power?

Very few procurement professionals will have been told that their buying process is simple and easy to use. Far more familiar is the compliant that it’s difficult to find the right vendors, that items are wrongly categorised and payment takes too long. Most consumer experiences are no better: over two out of three online shopping carts are abandoned before purchases are completed. Procurement organisations and organisation that can make their ordering process frictionless stand will be favoured by their internal stakeholders and customers.

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