Do Procurement practices cause dishonesty?
Author: Tim Cummins
To survive, suppliers must win bids and make money. Customers appreciate this point - most of them are supply organizations themselves. But how much money should suppliers make and how should they make it? That's where disagreements start to arise and where the potential for contention begins.
While modern procurement acknowledges the need for profit, it is the primary function charged with achieving cost reduction. It isn't easy to find the right balance so, in competitive markets, it is tempting to base supplier selection on the lowest price. In order to make things even simpler, the methods behind strategic sourcing sought to limit the impact of long term relationships (where loyalty or friendships might influence decisions) and to deconstruct acquisitions into component parts so that they could be 'commoditized'.
In principle, all of these steps made sense, especially in an era when global markets and constant innovation were creating a fast-changing competitive landscape. They allowed massive simplification and large-scale automation of procurement decisions. Many supply relationships became arm's length and 'success' was measured on a combination of negotiated savings and compliance with bid and contract terms.
In other words, concepts of value, reliability and broader business judgment were largely eliminated by these new scientific and objective methods. And it is certainly the case that input prices in general fell.
But it's all different now …
At this point, there are many who will say that the environment I describe is a thing of the past, that today Procurement has a renewed focus on performance and outcomes, a spirit of collaboration and relationship management. And I have no doubt that this is sometimes true, but I also know that many of those who believe in such change frequently find themselves swimming against the tide of traditional thinking and embedded systems.
I say this based on numerous factors, and will cite two of them;
- the experience of suppliers. I talk with suppliers every working day. In general, their experiences have not changed. Procurement decisions continue to be driven by the same measurements and procurement professionals are not open to exploring broader sources of value, or to examine the potentially negative impacts of rigid compliance.
- recent IACCM research (December 2019) shows that approximately 70% of negotiations today are virtual – the parties never meet. Even worse, a high proportion of those negotiations are undertaken through email – hardly conducive to deep and meaningful conversation, or examination of ideas or success criteria.
What is the impact?
In a previous blog, I highlighted the issue of supplier honesty – in particular the frequent disconnect between the claims made by Sales and Marketing and the limitations expressed in the contract. This is clearly contrary to society's growing demand for openness and transparency and many of those commenting on my blog decried the continuing dishonesty of suppliers.
But several made the valid point that 'As a supplier if we are honest, we lose the bid'. And I have many examples where that is true. So those in sales contracting and commercial management who espouse honest dealings are quickly shut down by their experience in the market. Of course, this does not excuse deliberate misrepresentation or lying. I am talking here about having an open conversation about risks and uncertainties, factors that could derail the desired result or outcome. and which can be effectively addressed or avoided only if they are discussed up-front.
Cooperation, collaboration, honesty – none of these is a unilateral activity. It requires change by both (or all) parties. Since they are the ones who control the purse strings, it is Procurement who have the power to drive this change. Without it, we have to accept a lack of transparency and with it, a continuation of sub-optimal results and the loss of both economic and social value.