Savings tend to ZERO over time. Especially for INDIRECT spend categories. Does this mean that diminishing returns will threaten the rise and rise of professional procurement? Or, simply, that procurement will have to find new ways to add real and lasting value?
By any measure, the procurement profession in Australia has made great strides in the last dozen years or so. Even branded “the fastest growing profession in Australia” after the 2011 census.
Yet, I fear many good procurement teams are starting to plateau. That is, their significant gains are flattening out. Their trajectory is stabilising. And, savings, particularly, are slowly petering out it seems.
You see, Australia is a small economy in global terms. It is also a service based economy, with around 70% gross national product (GNP) being serviced generated. Less than 10% is manufacturing driven nowadays.
What this means for us, is that most procurement teams are mostly focussed on buying INDIRECT goods and services – managing the cost of being in business. And not, for the most part, buying DIRECT goods and services – goods ultimately for resale and accounted for under ‘Cost of Sale’ on the Profit & Loss Account.
Strategic Procurement is a discipline largely geared to address DIRECT spend. Applying it to non-strategic spend has limits. Economists would quickly label them ‘diminishing returns’ … and I fear many procurement teams are starting to reach these limits after so many years positive development and bagging savings for eager organisations.
To put it simply, and crudely, there are only so many times you can go out to tender for the stationery contract and expect to generate meaningful savings. The 7th attempt anyone?
Exacerbating the problem is that Australia is primarily a market of few suppliers – an oligopoly. And often, in the B2B landscape, we are buying from a duopoly or even a practical monopoly. Price movement rarely follows from such an environment, certainly not at the 7th attempt.
So if procurement starts to struggle to make savings, when most addressable spend has been repeatedly addressed, what then is the role for procurement? Why do they need us?
I believe that procurement’s role is to bring VALUE. The difficulty is defining what, exactly, VALUE is for your organisation? For it differs by organisation, and over time. It changes. Procurement’s challenge is to tune in to the corporate mission (in both public and private sectors) and to make sure its contribution is relevant, meaningful and measurable.
And this means it may no longer be savings orientated as such. The value created may still be life cycle cost focussed, or risk management orientated, or sustainability driven. Or for that matter innovation inspired, even quality/service improvement tasked. Maybe even by using procurement as an instrument of policy? The only difficulty then, defining your exact policy to be achieved through professional procurement.
But one area of our end-to-end discipline has always been a poor relation it seems. Often starved of the attention it deserves whilst Procurement grapples with the far sexier strategic sourcing problem. Yet this area that can often make a true difference. Where the rubber hits the road. Where on-budget and on-time delivery counts: Post-award contract management.
Too often in the past, Procurement has signed and forgotten. Celebrated victory early. Counted the savings, the cost avoidance, the improved terms, the instant remedies. And passed the contract over to the business to manage. Not very well, as it turns out.
The business is usually operationally or customer focused. And becomes supplier focused only really when there is a supply problem (non-delivery). They effectively outsource contract management of the supplier – to the supplier!
Yet this is where delivery matters. And where we garner the hard and soft purchase benefits we listed so assiduously in the original business case document. Or won in the conference room negotiation so stubbornly. Yet these wins are often forgotten and unrewarded downstream where the rubber hits the road. And remain undelivered. Unrealised.
If savings tend to zero over time, benefits realisation can be the new ‘savings’ for us all. Professional contract management can yield these benefits. Ensure they are delivered, captured, applied and counted. That they are hard won after all.
To help, contract management automation systems can do the heavy lifting. They can keep all the contracts and compliance documents safely in one handy place. Register the contractual commitments. Ping proactive eAlerts for every milestone, every decision point, delivery date or renewal decision either days/weeks/months in advance. They can minimise risk. Obviate delays. Prevent over-spend. Offer e-approval routings, escalation pathways and real-time audit facilities. Or supplier input portals, performance reports, project dashboards.
With this sort of help, procurement could achieve much. Especially on DIRECT supply lines, long term service contracts or capital projects. All places where procurement could help improve the USER experience. And surely all areas where so many organisations are still looking for more VALUE.
Jonathan Dutton FCIPS is an independent management consultant specialising in procurement and supply side management www.jdconsultancy.com.au After a corporate career in both the UK and Australia, he was the founding CEO of CIPSA from 2004-13. Until recently he was also the interim sales & marketing director of Open Windows Software www.openwindows.com.au