Five tips to avoid buying failures

posted by Peter Smith
2 November 2020

Anyone who has worked in procurement for a while knows of disasters, whether something happened to them personally or to colleagues in the profession. It might be a negotiation that went badly wrong, a budget holder who specified the wrong item, or perhaps even a juicy case of procurement-related fraud.

Then, there are the legendary public-domain failures, going way back to when Rowntree Mackintosh wiped out their annual profits by cocoa market speculation. And then we have corruption and huge government, military, construction or IT failures, such as the UK NHS national IT programme, that hit the front pages.

Interesting case studies highlight key issues around how firms and governments spend money, and provide lessons for managers, and any interested person in the public and private sectors. Analysing hundreds of failures will help your organisation avoid bad buying.

Five tips to avoid buying failures:

1. Define clearly differentiated processes for buying (procurement)

Rather than standard processes, we often hear talk today of the target operating model or TOM. It is important, whatever we call it. The TOM is the set of process descriptions that explain how staff should buy goods and services. It should cover all eventualities, from day-to-day ordering of stationery through to buying the most complex IT systems or construction projects.

Usually, an organisation needs variants within the overall model, so that the process is defined differently depending on the size and risk of the purchase. Allow buying of low-value, low-risk items to be as simple as possible, with minimal and sensible controls, while complex purchases should require more rigorous approaches. But when I ran organisational reviews of procurement as a consultant, a revealing question to stakeholders was simply, “Do you know how you are supposed to buy things?”. It was amazing how often the answer was, “Not really”. That might have been because of unfriendly systems, confusion about the role of procurement, or poor communication of the TOM. But this lack of clarity and understanding all adds up to a much higher chance of buying failure or indeed fraud.

2. Competition is great – take advantage of it

Lack of competition may occur because of market structure (monopolies or cartels), because of supplier dependence, or because buyers simply fail to seek competition and thus weaken their negotiating position. Real competition, particularly where it is open and transparent, drives value and innovation. Even when we want to develop close, long-term relationships with suppliers, having the possibility to substitute a supplier undoubtedly keeps any firm on their toes, even if you then choose to work with them closely and collaboratively. Competition is also effective protection against fraud. Globally, government bodies giving large contracts to suppliers without competition is a warning sign of corruption and we’ve seen recently how suspicious Covid-related contracts looked in areas such as PPE, where normal rules of competition were sidelined because of supposed urgency.

3. Think hard about incentivisation

The issue here is best summed up by saying you get what you incentivise the supplier to do. For instance, if a supplier of outsourced finance services is paid based on how many invoices they process, then there is no incentive for them to drive down invoice numbers. And open-ended consulting contracts don’t incentive firms to finish the job. Governments get it wrong too – in Colombia, the government, acting with the best of intentions, managed to drive increased production of cocoa because of the way they incentivised farmers who they actually wanted to switch into other crops.

4. You can’t relax once the contract is signed

Many case studies highlight issues arising after the initial procurement had been executed. Although our profession has increasingly realised that contract management is within our sphere of interest, many practitioners still think their job is done once a contract is signed. However, for all but the most basic contracts, success is absolutely dependent on what happens once the supplier is actually delivering the goods or services in question. Contract and supplier management requires appropriate tools to keep records and to support proactive performance, risk and value management. It also inevitably involves many staff within the organisation, most of whom won’t sit in the procurement department. This work must be resourced properly, and staff need the right skills, technical and behavioural, to carry out their duties effectively. Procurement leadership must take responsibility and ensure that this happens.

5. Everyone in the buying process must be appropriately skilled

This is perhaps the most important. When assessing real-life case studies, few failures came from technical procurement department problems: almost always the issues were broader and involved different players within the process. So avoiding a buying failure and getting value from suppliers involves everyone who holds a budget, helps to decide what is bought or from whom, or manages suppliers post contract. The future role of the CPO (or procurement leader) must therefore focus on what we might call organisational buying (procurement) capability, not just what goes in in their own function.

☛  Peter Smith is a CIPS past president and author of Bad buying – how organizations waste billions through failures, frauds and f*ck-ups.

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