Buying While Blindfolded
Insurance Experts' Forum, October 27, 2011
A phenomenon is unfolding across corporate America, especially in financial services: the rise of procurement and vendor management functions. Once found only in larger organizations and government entities, these departments are now part of companies of every size. What concerns me is how many companies are getting this important function absolutely wrong.
Companies implement such programs with the best of intentions: manage spending, reduce cost, improve negotiations, strengthen contracting, eliminate fraud and guarantee outcomes. Unfortunately, many programs quickly deteriorate into a robotic process that effectively isolates buyers from sellers and focuses on a checklist instead of desired results. Sound familiar?
One common problem is that business-side buyers of specialized solutions (for example, an analytics tool or related service) cannot freely communicate with suppliers. Likewise, suppliers must operate in a cone of silence and avoid contact with buyers, or face disqualification. Sellers must therefore prepare a specialized proposal based on an RFP and perhaps a brief Q&A session. Making matters worse, procurement staff find themselves in an untenable situation when they are unfamiliar with the specialized solutions and services they are asked to procure.
If that weren’t enough, all-in-one procurement automation systems tend to pile on the complexity. One such tool, well known to many, sends out buoyant “opportunity notifications” to suppliers every day, letting them know that eager buyers are looking for a product or service. Unfortunately, these notifications have no details about the buyer or what they are looking for. Important specifics—such as industry, size of buyer and required skills/capabilities—are nowhere to be found. The unintended consequence is that suppliers don’t respond because they quickly learn that their efforts seldom yield business. Likewise, buyers end up getting half-hearted responses, often from less-qualified suppliers taking a shot in the dark.
A successful procurement program should do these things:
• Focus on finding the most suitable solution, not on simply following a checklist or finding the lowest cost. Every solution and procurement situation is different.
• Foster business relationships and trust between business-side buyers and solution providers, whether or not a purchase ultimately takes place.
• Bring best practices to the negotiation and contracting steps.
• Help manage risk; ultimately, the business-side buyers should own the risk, not the procurement function.
• Avoid abdicating responsibility to tools and technology. Buying and selling are based on relationships and personal trust.
• Measure and report the value delivered.
• Keep it simple for buyers and sellers.
If your organization has a procurement or vendor management program, don’t allow the program itself to become the focus. Find the best solutions, taking into account a range of business-decision factors. And don’t allow your procurement program to isolate your business people from the solutions they are seeking. In other words, don’t buy while blindfolded!
Rod Travers is EVP at The Robert E. Nolan Co., a management consulting firm specializing in the insurance industry.
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