The role of procurement as trusted adviser to management.

Author:Young, Bill
Position:Reprint
 
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Procurement's journey from transactional processing to strategic business partnering is not complete. Many argue it has even stalled. Some personal successes are evident, but they are individual achievements, not an organizational model that can be copied. We argue that this should surprise no one. Too many unresolved conflicts exist between the role of procurement and its internal clients, and the savings metrics used by procurement belong to a former age and aggravate the problem. Where good relationships exist, they do so between individuals who trust each other in spite of these conflicts. We argue that trust is fundamental and essential in the type of relationship that procurement is aiming for, but the metrics and governance used by procurement are antithetical to its aims. Procurement has pushed hard to attract brighter and better staff, but research shows that capability is not enough. A genuine understanding of and concern for clients' ambitions and goals is needed: Procurement needs to be benevolent as well as capable in the way it works with clients. Six distinct areas of conflict demonstrate how procurement's targets and metrics serve to defeat its strategic aims and to undermine the work it invests in building capabilities. These include incentives to engage late with vendors, to over-specify requirements and even to shrink a business rather than grow it. We conclude that there is a need for an alternative to savings as the main reporting metric for procurement; the one we recommend is Spend Control Index. This isn't a completely new concept, but very few organizations set out to use it rigorously as their primary indicator of procurement's performance. In our view, doing so would catalyze a change in behavior and encourage real trust, leading to the strategic business partnerships all parties desire.

Tensions in the Realm of Procurement

Procurement today is a complex management service, intended to support the strategic aims of the organization. However, some of procurement's intended customers are confused about its role and intentions--and hence don't trust its motives. This is only partially due to customers' misunderstandings; a good bit of it is procurement's own fault. While presenting itself as a strategic business partner, some purchasing practices are in fact tactical--and, worse yet, self-serving.

This creates a trust issue with procurement's clientele--both internally and externally. In a day and age where collaboration is a strategic must, unnecessary tensions created between an organization's own business and functional units are strategically relevant and financially harmful.

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Kinnaird and Movius, arguing for a more sophisticated approach to negotiations, observed that: "On the one hand, business leaders ... want to be able to sit down and talk freely with their counterparts, shaping deals and exploring potential options. On the other hand, we have procurement attempting to constrain dialogue within a process that it insists on controlling, seemingly fearful of the very relationships that business leaders want to cultivate." (1)

The reasons for lack of trust show up mainly in procurement's target metrics and the way in which procurement reports them. The metrics are excessively focused on savings, even when those savings are secondary or cannot be measured. While savings are a proper target for certain cost--down programs, the aggregated total of savings is a misleading performance indicator--its acceptance and use create perverse incentives.

Deeper down, these tensions are an outcome of two distinct views of procurement: one rooted in transactions, another based on relationships. Both views are necessary, but the inability to distinguish between the two as the situation demands creates dysfunction.

We suggest that a solution lies in better defining procurement's transactional versus relationship responsibilities. We offer such a view, as well as a metric for control over external spend. This is a performance indicator superior to cost savings. Accepting this as an overriding objective would align procurement with its customers, create trust and make it a truly strategic partner.

Context: the Changing Role of Procurement

Procurement has three broad functions:

* The first is managing internal transactions for ordering and receiving goods and services and handling procurement data. The primary goal here is to maximize the efficiency of transaction flow and reporting.

* The second is support for vendor engagement and contracting processes. Procurement's roots are in regular price negotiations for raw materials, packaging, tools, consumables, components and other regular purchases. It is largely a tactical and transaction-focused process.

* The third area is "value-based strategic procurement that can translate into bottom line improvements to the corporation ... to ensure that the procurement strategy is aligned with, and that it rolls-up to, the overall corporate strategy." (2)

The Internet has created massive opportunities for driving efficiency in the first two functions--from automating order processes to establishing online, blinded bid systems, for example. These have the lion's share of attention in the general management press. However, apart from that, the essence of the first two roles has not substantively changed.

It is in the third role that procurement has attempted...

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