Take my word for it

We met William for the first time in September’s blog and last month we followed him as he managed a supplier selection process. He is a category manager for a global organisation and is responsible for a wide range of spend including marketing. As a result of the successful supplier selection process he persuaded his colleagues in the marketing team to use 3 direct marketing agencies. By agreeing to the organisation’s framework terms and conditions, the 3 agencies became preferred suppliers.

Kate, a team leader, wants to launch a new direct marketing campaign. She passes her requirements to William who uses the eSourcing tool to issue the request for a proposal (RFP) to the 3 preferred suppliers.

All the suppliers respond but the prices vary greatly. Before William presents the result of the RFP to the marketing team, a number of the marketing managers say that the supplier called Sandringham has the best track record and should be awarded the campaign. William is aware of social proof (note 1) so interrupts the discussion to present his result which shows that Sandringham have proposed the lowest number of days to complete the work. William questions whether the campaign can be delivered in such a short time and after a few minutes evaluating the proposal everyone concludes that Sandringham have not understood one aspect of the requirement.

By contrast, St James have the highest price although they propose the median amount to time. One of the marketing managers comments that St James have a reputation for attracting the best talent by paying them the most. The other marketing managers agree. William explains a Veblen good (note 2), one where a high price boost demand, and that a high price does not necessarily lead to a better campaign.

St James’s proposal provides the marketing team with a price anchor and leads them to select the last of the 3 agencies, Windsor, subject to final agreement on the price.

William contacts the account manager, Harry, from Windsor. Harry explains that they are very busy but their best direct marketing manager has just become available. William is aware of scarcity bias (note 3) so doesn’t panic and asks Harry to look at the price again. Harry responds positively and the next day and William passes the final details to Kate who raises a purchase requisition for Windsor.

This case study illustrated the danger of uncritical acceptance of claims by others. This may be based on the word of one person or of many. By recognising bias and being prepared to challenge it William is able to deliver a better outcome.

Notes

(1) Robert Cialdini, Professor of psychology and marketing, persuaded a hotel chain to adapt the message they left in guest’ room trying to encourage towel re-use. He created 3 different messages. The first, his control message, which stated the environmental benefits, was successful among 35% of visitors. The social proof message, in contrasts, simply stated that most people re-used their towels. This version boosted compliance to 44%.

(2) Dan Ariely, Professor of Psychology and Behavioural Economics, recruited 82 people from Craigslist who were willing to receive 2 small electric shocks in the name of science. All participant were given a painkiller; half were told the painkiller cost $2.50 a dose and half that it was only 10 c. In fact, they all received placebos. 85% of those taking the expensive pill reported less pain compared to only 61% taking the cheaper version. The high price of the pill lead to an assumption that it would be more effective.

(3) Stephen Worchel, a psychologist, recruited 134 undergraduates and asked them to rate the quality of a batch of cookies. The participants tasted the cookies from a glass jar containing either 2 or 10 biscuits. When the cookies were in scarce supply they were rated significantly more likeable and attractive. The participants were also prepared to pay 11% more. Scarcity bias means that the less there is the more you want it.

The Oval Office or the press office

In last month’s blog we met William for the first time. He is a category manager for a global organisation and is responsible for a wide range of spend including marketing. Over the years, the number of marketing agencies has proliferated as new people have joined the marketing team and used the agencies they have worked with before. Kate, a team leader who regularly creates purchase requisitions for marketing service, explains to William that there are too many preferred suppliers in the marketing category to make a choice. William realises that he has missed the opportunity to influence Kate’s behaviour and people like her.

To rectify the situation William plans to issue a request for a proposal (RFP) for marketing services. He attends the marketing team meeting and asks them to suggest the scope of an RFP which would deliver the largest saving. The marketing team suggest branding. William is aware of the danger of claimed data (note 1) and so analyses the spend data for the last 12 months. He sees that there is only one brand agency, there were 4 purchase orders and each one was high value. There are, however, 20 direct marketing agencies, 120 purchase orders, and although none of the purchase orders is high value, the total value is over half the total spend of marketing. William presents his data at the next team meeting and manages to convince the marketing team to support a RFP for direct marketing.

As part of the RFP, suppliers are asked to provide a price for a typical scope of work for each of the sub-categories of mail, telephone and internet. One agency, Balmoral, say they offer more than the scope of work. William is aware that Balmoral want to change the competitive set (note 2) so tells them that proposals will be disqualified if they do not comply with the scope.

After 2 days of back-to-back pitches from the suppliers, the marketing team are ready to make a decision. William knows that scores and prices are relative, that is, neither are high or low in absolute terms but is comparison, so puts them into a table and presents them to the marketing team. William summarises the prices and points out that Balmoral has the highest price. The marketing manager, Harry, who uses them the most reacts badly and starts to question the RFP process. William is aware of confirmation bias (note 3) and knows how difficult it is to overturn a negative opinion. He quickly asks the other marketing managers for their opinion of the process and the feedback is overwhelming positive. He then relays the conversation with Balmoral about the scope and jokes that not even the Queen could afford their prices. Harry says that Balmoral often provide more than requested and agrees to try the lower price suppliers.

People don’t have the time or energy to evaluate every decision logically. Instead, they rely on short-cuts to make decisions more quickly. These short-cuts are prone to biases. The rational mind “thinks of itself as the Oval Office when actually it’s the press office” (Jonathan Haidt). William recognises bias and adapts his approach. This results in him having better relationships with key stakeholders and enables him to deliver a better outcome for procurement.

Notes

(1) The National Survey of Sexual Attitudes and Lifestyle (NATSAL) surveyed 15,000 people in 2010 and found that British heterosexual women admit to a mean of 8 sexual partners compared to 12 for men. The difference is logically impossible and illustrates the danger of claimed data.

(2) A quote from Rory Sutherland, Vice Chairman of the Ogilvy & Mather Group gives an example of successful changing the competitive set: “How can Red Bull charge £1.50 a can when Coke only charge 50p? Weirdly you make the can smaller. Suddenly people think this is a different category of drink for which different price points apply.”

(3) Psychologist Albert Hastorf and Hadley Cantril ask 324 spectators to count the number of fouls committed in a game of America football between Princeton and Dartmouth. Spectators were twice as likely to see the opposition commit a foul as they were to spot a foul by their own side illustrating confirmation bias.

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
  • Analytics – 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 in 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 the customer experience from business to customer (B2C) systems like Amazon to business to business (B2B) or enterprise systems like SAP, Oracle/Ariba and Coupa.

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. B2C systems look better and are easier to use than P2P 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 P2P scope. Stakeholders said they found the system difficult to navigate and that relevant information was not readily available. Fix the system and we could fix many of the business problems like late payment of suppliers invoices.

With the help of a large technology consultancy, we re-engineered the P2P processes and designed a new user interface (UI) to give a better user experience (UX). To give an example, we simplified the landing page, populated it with frequent tasks like approving requisitions, and created a flashing red bell to alert users when they were required to complete a task.

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 rather than services. When I searched Amazon for office cleaning services, for example, 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, P2P systems have to be able to cater for a much more variation and 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. By contract, P2P systems are designed to drive compliance to the company’s policies. One of these policies may be to reduce costs.

Amazon Business was launched in 2015. If it is as successful as the customer offering, then further pressure will be applied to B2B providers. That said, the P2P UX is never going to be as good as “Amazon” because there are so many more requirements to be considered.

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. This figure comes with a 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 tackle 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. An 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 with the exception of blockchain. 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
  • Blockchain

All this technology generates data. Many procurement professionals ask themselves if technology makes them more efficient? Then they 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.”

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