“Procurement by rote” is no longer good enough

As a negotiation specialist, Negotiation Partners works with a wide range of government agencies, large corporates as well as SME’s.   In that work, we have been exposed to a wide variety of procurement processes, systems and strategies.  Now that the COVID-19 crisis has forced a critical re-evaluation of how organisations do business, there are some recurring themes which we believe every procurement function would do well to consider.

COVID has not yet run its course and there are plenty of new global challenges already on the horizon.  It would be a shame to waste a good crisis.

Now is a good time to learn the lessons and take a close hard look at how your procurement team does business.   How can the team deliver improved outcomes not just when procurement is easy, but also in challenging environments?

The last 18 months have shown that business as usual is not going to cut it going forward.  Just following the same “Procurement by rote” system of Approach to Market, Evaluation, Competitive Dialogue, Best and Final Offer (once, twice or maybe a few more ‘final’ times), followed by Negotiation and Contract Award is just not good enough.

The question is — what next?

Working across many different industries, we see four fundamental challenges.  These have always been at the heart of procurement, but some have been quietly taken for granted or ignored until they were suddenly thrust into the limelight during the COVID crisis.

These challenges are:

1.    Delivering long-term value to the business

2.    Effective supplier relationship management

3.    Governance and risk management

4.    Process optimisation and digital integration

Whilst there is much to be said about the latter two, I will focus today on value generation and relationship management, two areas that continue to be much talked about, but are in practice often neglected.

Delivering long-term value to the business

For too long, the core objective of procurement was seen to generate cost savings.  This is an exercise of diminishing returns.  Worse, in many cases, it has overshadowed the primary objective of procurement: to ensure the timely supply of goods and services so that the business can operate sustainably and profitably.

For many businesses, the COVID crisis has re-affirmed that maintaining a timely supply of business-critical goods and services is essential for operations, whereas maximising the profit from operations through cost savings is necessarily a secondary objective.

Managing supply chain risk, smart diversification, trusted relationships, quality inputs and time are some of the most important value drivers that are often not reflected adequately in a dollar figure.  Worse, they are often sacrificed in order to achieve a declared savings goal.

Dollar savings are comparatively easy to negotiate.  The time has come to take a broader look at what constitutes value and to equip procurement teams with the skills and tools to deliver more than just dollar savings for the business.  A key pre-requisite to doing so involves effective supplier relationships.

Supplier Relationship Management (SRM)

In our experience, many procurement teams view their relationships with suppliers as competitive.  The best possible outcome and a good relationship are seen as mutually exclusive.  In that context, the word ‘relationship’ has been much abused in the process of extracting concessions from suppliers.  Even well-established procurement teams with category management and strategic sourcing teams often fail to live up to the promise of delivering genuine business partnerships, rather than merely transactional relationships.

We know that power ebbs and flows over time.  The COVID crisis has shown that good supplier relationships can be the difference between achieving security of supply and business failure.  Even though “trusted relationships” don’t show on the balance sheet, businesses will do well to develop them, at the very least with business-critical suppliers.

Progressive organisations have been investing in building relationships for some time and have learnt that co-operative supply partnerships can also be significantly more profitable than exploitative relationships.  It's time to consider and treat key suppliers as supply partners by building genuine relationships beyond the transaction itself.

The problem is: you can’t outsource relationship management to an overseas call centre or to software.  Relationships require investment and skilled engagement on the ground, but this is an investment that pays dividends.

Procurement teams that are empowered and skilled in developing trusted relationships with key suppliers will not only to drive better financial outcomes but will also provide a buffer against sudden changes in the commercial landscape.  Organisations that are implementing these changes to policy today will be the ones reaping the benefits tomorrow and especially in the longer term when the next crisis strikes.

For the foreseeable future, we are all in this together and it is high time to discard the competitive mindset.  Extraordinary, sustainable outcomes can not be achieved at the expense of suppliers, but only with their full participation and engagement.  Where procurement teams negotiate effectively to deliver both value and relationship benefits, their organisations will prosper.  How do we know?  Because we practise what we teach — and we only teach what actually works in practice.

Where to now?

Negotiation Partners specialises in helping procurement teams to re-shape the way they do business.  This delivers superior outcomes whilst also strengthening and deepening supplier relationships — we guarantee it.

Our NCRS diagnostic can pinpoint how your team currently deals with challenging negotiations – both internal as well as external.  Used in a recent Procurement Industry Benchmark Survey, the diagnostic will show how your team performs compared to a large cohort of procurement executives as well as to the general benchmark of 2000+ senior international executives.

Contact Negotiation Partners if improving the procurement effectiveness of your team is on your agenda for the future.

About the author

Negotiation Partners Managing Partner, Dr. Matt Lohmeyer, is a professional negotiator specialising in public and private sector procurement.  With more than 15 years of experience, Matt assists public sector clients at council, state and federal levels, as well as working with corporate procurement teams.  Matt is a member of a small team of external negotiators regularly engaged by the Australian government to negotiate defence contracts.  He also consults across a wide range of industries, including aerospace, construction, pharmaceutical, travel and education.

For details of Matt’s career and personal recommendations from clients, visit his LinkedIn profiles at www.linkedin.com/in/lohmeyer/ and www.linkedin.com/in/negotiationpartners/