Procurement Teams must have performance incentives too!
Our recent interaction with an embedded procurement team proves that saving money and “rationalizing” the vendor portfolio are only part of the picture for a procurement initiative. Procurement teams must be bound to performance metrics and incentives to keep projects performing well too!
In these challenging economic times, it’s not surprising that companies are focussing more upon cost controls. These take many forms: increased use of marketplace bidding (RFQ), vendor rationalization (shrink the pool, get better pricing leverage), and increased internal scrutiny of proposed transactions. These efforts are, on their face, the right thing to do to control costs and extract every bit of value from the dollars spent outside the company on products and services that are needed.
The problem arises when these procurement teams are inappropriately focussed upon procurement-specific performance metrics and they fail to sustain momentum for projects that need goods or services in a timely manner to perform.
Procurement teams can mis-fire in the interest of saving money and fail in their role to position the business’ project teams to be effective, agile, and timely in their performance. Some examples:
| Procurement Initiative | Expected Benefit to business | Unexpected Impact to Projects | Procurement Behavior Needed |
| Offshore IT services and support | Reduced hourly cost, great breadth of talent from large outsourcing firms | Increased overhead to manage offshore teams, disintegrated work environment, greater number of hours required to perform tasks | Increased scrutiny and analysis of performance metrics versus an onshore benchmark for the same work to assure that the benefits expected are being captured |
| Vendor Rationalization | Reduced pool of vendors increased pricing leverage and simplifies engagement and staffing. | Creates significant impediments to re-instate proprietary vendors (incumbent or new) by having to create new commercial relationships when the project requires them | Open-ness to adding new vendors where quickly justified and a speedy process to memorializing that new relationship. |
| Vendor Management Outsourcing | Procurement team itself outsources some common procurement activities to an offshore firm | Creates another disintegration when working with the project team and leads to frustration and delay for processes that had recently been working well when fully onshore | Provide a full functional, documented, and internally well trained procurement process that all participants are able to perform. The absence of a solid repeatable process is the core of any failing when outsourcing this activity |
| Supplier Agreements Management | Procurement team allows supplier agreements to lapse to force renegotiation when services or product is needed | Impacts the project because the project team must drive the rapid engagement and negotiation with both the procurement and supplier teams before any procurement can be made | Periodic and systematic review of all agreements on file to ensure that those suppliers who are still known to be incumbent suppliers are renegotiated and renewed before a project needs work with the supplier. |
These few examples are illustrative in the gaps that can arise between the coporate goals set for the procurement team (and how their “success” is measured) versus the goals that are set forth before projects (associated with time, cost, and resources).
We urge the reader to raise the question: Do our procurement teams have the right incentives to assure that projects not only receive the best of what our vendors can offer but also do projects receive the best of what internal procurement can offer to drive project success?
A failing answer to this question (from the project perspective) will create unncessary costs in time spent by project resources to manage disintegrated work by procurement, support desired vendors, justify against unsuitable vendors, etc. Ultimately, the costs to projects to cope with mis-aligned procurement efforts are real costs back to the company that undermine the very procurement savings that were sought in the first place.
Procurement must both save the company money and must ensure that the internal customers of procurement are supported in a positive manner with performance metrics that support such focus.
Nice article. Thanks.
Eugene
Comment by Eugene — October 21, 2008 @ 11:24 am