Buying: Look after the pennies and the pounds will….fly away

This was certainly one of my mother’s favourite sayings, and for sure it makes sense on a personal level.

However, in business if you ONLY look after the details, you have a good chance of missing the big leaks. How can projects honestly go Billions of pounds over-budget after all of the planning and costing that goes on. Quite easily it seems…especially if the customer procurement team is so focused on minimizing failure that they lose sight of the big picture.

Let me give you an example. One book written by respected domain specialists, dedicates a chapter to the need to understand the supplier’s cost and profit structure, including variable and fixed costs, profit and pricing compared to the market rate. Towards the end of the chapter we come to the “Why”. To ensure the suppliers do not go out of business, and therefore represent a delivery risk. Talk about taking a sledgehammer to break a nut! Firstly, there is virtually no company in the world whose accounting system can provide such detail for a single opportunity, secondly, one of the hardest activities in sales is to know what the “market rate” actually is for a suite of services or products, and thirdly this is a waste of time as the level of accuracy you will get will be of no commercial use to you.

An example was cited that a Local Authority stipulated that all bidders must pay a “living wage”. Very sociably conscious. However how do you assess whether this is the case?. What if one supplier provides luncheon vouchers, and another provides transport to their staff in place of a higher “living wage”. Do these get evaluated? Instead of trying to enforce this, you would do better to assess the comparative probability that any supplier does not provide a socially accepted package.

Before looking at an alternative approach, let us ask the obvious question..”Why do you need to know this?”.

The answer seems obvious “To gauge the uncertainty that the supplier will not be able to honour his or her contractual commitment”. Before expending resources to undertake this impossible task surely you should ask the question “So what?”. If you have lots of suppliers and you can replace a defaulting supplier with a minimum of inconvenience..why bother?. Risk is the financial impact to you of an uncertainty, and in this situation may well be low. This is classic Kraljic matrix stuff. If on the other hand you are going out to competitively tender and the cost of change becomes significant, the market will do its job. It will be sufficient to gauge the uncertainty of delivery default through questions about market share trends, and or resource availability.

The only time you may want to be reassured that the pricing you receive is “reasonable” is when you are considering a direct award in Kraljic’s strategic quadrant, and the scarcity of suppliers means this risk could have a significant impact. Even here the concept of market rate may not be applicable, and as Kraljic points out, your negotiating position is often weak.

So what’s the alternative?. Start with the big picture.  Nothing new there, Kraljic’s matrix seeks to do exactly this, and by evaluating the supplier’s view of the workscope will give you an idea of your negotiating strength. This does not however help you pick the most suitable supplier.

Let’s look at an different approach in this scenario.

Step 1:  Ascertain what a contractual train-wreck would look like..ie what must you cover at all costs.

Step 2: Incorporate the project or business-line drivers, such as ESG, local content, or technology showcasing. Every company seeks to differentiate itself, and for example, if your company promotes its project management capabilities and has secured contracts on the back of this, it could be considered mis-aligned to then sub-contract large workscopes to suppliers.

Step 3: Identify the top 10 risks to success for this project, and assess the impact the workscope in question can have on these risks negatively, but also positively. If delivery time is critical,what impact on the overall project could this workscope have if delays occur; but also what positive impact could it have if delivered early?

Step 4: Identify the top 10 opportunities to exceed the goals of the project and assess the contribution of this workscope to these stretch targets. For example if accelerating the schedule results in bonuses or early revenue streams, then this must be part of your evaluation criteria.

Step 5: Assess the results and decide which business model you want to apply. For example, if the workscope has little impact positively or negatively, and there are multiple suppliers, you may decide on a price-driven model, if on the other hand there is significant impact and technical differentiation between suppliers you may decide upon a more collaborative approach.

Step 6:  Look at what outlying risks exist and ask whether they can be managed contractually, rather than modify the workscope evaluation to incorporate them.

Step 7: Build your supplier selection matrix including direct and indirect driver related criteria, constraints and opportunities.

Step 8: Establish what questions you need to ask your suppliers in order to compare their ability to deliver your goals; not to satisfy your minimum requirements.

Step 9: Send the questions to the suppliers as part of the tendering process.

Step 10: After submission, invite each supplier to review and explain their responses with you in order for you to make an assessment.This will help remove some of the subjectivity inherent in your questions AND their interpretation of your questions.

Step 11: Compare the different responses as a set of graphic visualizations, and as a team select the supplier that meets most of your requirements.A deterministic score can never reflect the reality across the different topics you are evaluating, and is certainly impossible to use as the basis of a group discussion.

Step 12:. Take the weak elements of the selected supplier, and look at how you can ringfence them contractually, or through negotiation.

Step 13: Post award, reassess the supplier evaluation using the same criteria through the contract life and show as comparable visualizations used in service quality reviews in the form of metrics.

This approach aims to avoid “diving into the weeds”. You will rarely have enough detailed information at your disposal to make an accurate competitive analysis, so don’t bother. Focus instead on what is important  to the project as a whole and your company’s success, and avoid the billion pound over-runs!