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.

Best practise in procurement

This is for all those people who haven’t worked in procurement or have worked for organisations where procurement feels more like a barrier rather than an enabler.

Before describing some examples of best practise, it’s worth looking at the reasons for creating a procurement function in the first place. If you’ve worked in large organisations then these problems will be familiar:

  • Suppliers aren’t paid on time and they refuse to deliver until payment is made
  • A supplier is no longer able to provide a critical item. There are a number of possible reasons for this, for example, products like software reach end-of-life and support is withdrawn, a supplier is acquired and the new owner replaces the item with a more expensive one or the supplier goes into administration
  • Someone, like a finance manager or an internal auditor, starts to ask questions about what’s being spent, how is it being controlled and whether they’re getting value for money. A profit warning or suspicion of fraud may have sparked these questions.

So what is best practise in procurement? Below are some examples of the three key areas: policy, people and systems.

  • It sounds a bit dull but a clearly defined policy and set of procedures and processes is essential. Everyone in an organisation has a stake in procurement because they’re either responsible for ordering items or managing the budget that pays for them or use the items during their day to day work. The only way to avoid chaos with so many people involved is to agree on the rules that govern the main processes. The policy should be drafted in such a way as to help people do the right thing and not to catch them out
  • Once the policy is agreed then a team is needed to work with the business to implement it. The individuals in the team should have good relationship management skills, enjoy analysis, whether that’s numbers (spend reports) or words (contracts), and be commercially minded
  • Procurement involves two main processes, source to contract (S2C) and purchase to pay (P2P). The only way to ensure compliance to the policy where there are a high volume of transactions is to use systems with the rules built in. IT systems generate high quality data which enables the procurement team to look for opportunities to improve the price and reduce the risk.

By implementing best practise procurement, organisations will avoid the problems that often arise when they work with others and generate greater value for everyone involved.

Step down from your ivory tower

Academic and consultancy research seems to be pre-occupied by the question of whether procurement’s success within a company is a function of organisational status or strategic alignment. Some of it offers interesting insights into changes in procurement but a lot of it is irrelevant.

Some research argues that procurement should work towards getting greater recognition by the business. This feels a bit like asking for respect without having earned it. Furthermore, there is no evidence that procurement performance is related to status.

Strategic alignment is the term used when the procurement strategy is derived from and aligned to the company strategy. This assumes that the company strategy is clear and that everyone is executing it properly. In practice, there are many factors to consider when developing sourcing strategies and some categories of spend are simply not strategically important for the company.

The article called Procurement at a Crossroads – Disrupt or be Disrupted by Soren Vammen, CEO of The Danish Purchasing & Logistics Forum and Lars Bjerregaard Mikkelsen, Professor at Aarhus University, is a case in point. Ironically they argue that procurement should be “more relevant to their organisations”. At no point do they consider factors that limit procurement’s effectiveness such as poor data or inadequate systems. It’s almost as if they’ve never run a sourcing process.

If this type of research is going to have any value then it must be based on a genuine understanding of the challenges facing procurement professionals and good empirical data. Many academics in this field would be well served by adopting Peter Drucker’s approach when he admitted that “My greatest strength as a consultant is to be ignorant and ask a few questions.”

Poacher turned game keeper

Reading about the careers of different people in marketing in CMO’s Developing your skill set on the other side of the tracks made me wonder how many procurement professionals have moved from industry to consultancy or vice versa.

Deloitte’s global outsourcing survey suggests that more are doing so. Respondents said that they planned to double outsourcing from 15% in 2014 to 29% in 2016. Furthermore, supplier relationship management has become an increasing important source of savings suggesting that CPOs are placing greater value on softer skills.

Anything that broadens your experience is a good thing. Having an in-depth understanding of your business partner’s position makes the relationship more constructive by reducing unnecessary friction and enabling a win-win outcome to be reached more quickly.

Not seeing eye to eye

I often work with Finance, partly because Chief Procurement Officers usually report to Finance Directors, but also because my role requires me to facilitate better ways of working between those doing the deals, those using the deals and those trying to report on them.

It came as no surprise that a recent survey found that Procurement’s “rosy” view of what the function contributes to an organisation’s bottom line is often not shared by their colleagues in finance. According to a study called Bridging the Gap between Finance and Procurement, nearly half of finance leaders claim that a fifth or less of procurement savings wind up contributing to their companies’ bottom line.

Perceived shortcomings in the way procurement functions track and communicate savings, how they collaborate with finance departments and how they work with the wider business were responsible for the disconnect.

In my opinion, too many organisation rely too heavily on spreadsheets. Effective systems drive compliance to policy. System generated reports provide accurate data which help decision making.

British Prime Minister Benjamin Disraeli said that “There are three kinds of lies: lies, damned lies, and statistics.” It’s time for more organisations to invest in the systems that properly support their business.

Brexit continues

Theresa May’s gamble failed – the Conservatives lost their parliamentary majority in the general election on 8 June and have turned to the DUP to support them in forming a new government.

In March I examined the constraints facing the British government and the EU to provide some indication of the impact of Brexit on prices in a blog called Brexit Begins. Although the general election results have cast doubt over the government’s plans, it is still possible to draw three broad conclusions.

Firstly, Mrs May’s priorities must change to put the economy and jobs first. This suggests that the single-market and customs-union will remain options.

Secondly, the vast quantity of Brexit-related legislation will be harder to process in a hung parliament. This means that Mrs May must compromise and consider the demands of Remainers.

Finally, far more time is needed than is available so Mrs May must accept the EU’s sequencing plan, which means dealing with the Article 50 divorce before discussing new trade arrangements. That makes a case for more generosity from the British side, particularly over EU citizens in Britain and the sums needed to pay the “Brexit bill”.

Many consider a hung parliament to be a bad thing. It the case of Brexit, however, it may deliver a better economic outcome which will be good for buyers.

The promise of blockchain

Introduction

On 24 May, bitcoin hit an all-time high of $2.791. But by 28 May nearly $4 billion or almost 20% was wiped off the value.

Bitcoin is an example of a technology called blockchain. Although the idea of blockchain has been around since 1991 it was only in 2008 when Satoshi Nakamoto published a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” that blockchain found a commercial application.

Blockchain started in the software industry but its notoriety has spread to other industries with almost $1bn invested in it in 2016. Procurement is no exception: blockchain was one of the main topics of discussion at SAP Ariba LIVE in Las Vegas in March 2017.

So what is blockchain? The most accurate description is that of a secure digital ledger on which transactions can be made and recorded. Digital ledgers are not a new concept, but the difference with blockchain technology is that it is not based on a single or central ledger but decentralised ones in which stakeholders on all sides of a transaction can make and record transactions.

If you want a more detailed explanation of blockchain then it’s worth watching Shai Rubin’s video called What is blockchain.

How could blockchain be used in procurement?

Although blockchain is still in its infancy, it could have an enormous impact. And it could have wide-ranging uses for procurement teams up and down the source-to-settle process.

  • For sourcing teams, it could be a new due diligence and “track-and-trace” tool that allows them to quickly determine a commodity’s or good’s point of origin, which would help drive visibility, control, and risk management into the supply chain and achieve enterprise or regulatory compliance;
  • For legal and procurement teams, it could be a “smart contract” between two trading partners – a digital, automated record of what goods were bought, sold, and delivered, that is updated in real-time by end users across the line-of-business;
  • For human resources and procurement teams, blockchain would allow an organisation to perfectly map business requirements to external workers and create an untouchable system of record that captures payment, project, and contract
  • For accounts payable (AP) departments, blockchain could be an all-in-one purchase order (PO), requisition, and invoice that links upstream sourcing and procurement processes with downstream payment remittance; and it can create an auditable report;
  • For suppliers, it could be a work order and a track-and-trace tool, in addition to a contract and invoice, and allow suppliers to conduct their own due diligence further down the supply chain.

Conclusion

Blockchain is one of the most exciting and potentially disrupting technologies to emerge recently. It has significant potential for procurement. Up and down the source-to-settle process, blockchain could increase efficiencies, visibility and agility for end users and deliver greater fidelity, value and performance. However, as bitcoin’s value demonstrates, there is still a long way to go.

Do you consider only the least-bad option?

Earlier this month I attended an event where the Procurement Salary Guide and Insights 2017 Report was presented. There were some great presentation from Dr John Glen, Andrew Coulcher FCIPS and Scott Dance which highlighted the current economic and political uncertainty but also demonstrated that salaries are increasing and there are more jobs being registered. Good news for anyone looking for a pay rise or a new job!

As is often the case, the most thought provoking comment came from the audience.

Best practise is created not by single individuals but by groups of people coming up with lots of ideas, testing and refining them. This means that certain organisations take the lead in specialist areas.

Why, therefore, do some organisations demand experience of their sector even when none of the organisations in that sector lead in the specialist area? For example, why does an exploration company demand experience of the oil and gas sector when recruiting for a supplier relationship manager; why does a bank require financial services experience when recruiting for an IT category manager; why does the NHS require experience of, well, the NHS when recruiting for a commercial manager?

The inevitable consequence is that these sectors continue to underperform in the areas where they are recruiting.

It’s time to acknowledge that sector experience is both a good and bad thing. Rather than limiting choice to only the least-bad option, it’s time for organisations to consider for the best-best option.

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