Risks of a Decentralized Purchasing Strategy

Today, we break down the procurement risk of operating with a decentralized and poorly managed purchasing strategy. It may seem obvious that there are more benefits than drawbacks to procurement centralization because it increases oversight and guidance to all areas of the organization. The ability to have a managed flow of suppliers and contracts improves efficiency and tracks spend more easily. But looking beyond the benefits, what are the risks of decentralization?

The Risks of a Decentralized Model:

  • Extremely difficult to scale as the organization grows.
  • Knowledge and resource sharing can be lost when there isn’t a shared platform for all units of the organization.
  • Greater duplication of efforts across departments or business units.
  • The responsibility of understanding what is allowed for public funding under federal, state and local laws is left up to each department and manager.
  • Audits become exceedingly more complicated, expensive and drawn-out.

To have a successful centralized purchasing strategy, there should be clearly stated internal processes, with checks and balances, to approve purchases and contracts. Centralized procurement can be bureaucratic, it’s important there are measures in place to avoid being overly concerned with procedure at the expense of efficiency. Utilizing technology makes everyone’s  job easier from an procurement associate to a CPO and also keep procedures streamlined

While recognizing the value of each units’ relationships with their suppliers, successful centralized departments will function as resources across business units, to share knowledge, processes, services and technology.

3 Ways To Drive Value Through Procurement

The procurement function is rapidly evolving, gone are the days of tunnel vision focused on driving down costs and executing contracts. At FairMarkIT we are looking beyond the spreadsheet, here are 3 ways to drive value as a world-class procurement organization:

Use Technology To Empower. Procurement is one of the few departments that impacts almost every role in your organization, by making this relationship user-friendly and utilizing collaborative technologies you’ll be ahead of the trend. According to Gartner, by 2019, 40% of procurement and sourcing suite vendors will modernize their user experience to improve the ease of use and user adoption of their tools and incorporate some cognitive capabilities into their solutions.

Just Say No To Isolation. Utilize solutions that promote collaboration internally and between the procurement team and vendor. Encouraging teamwork and partnership in procurement fosters robust communication and cost-savings to internal teams and vendor relationships. Sourcing and procurement have long evolved from their back-office ancestors of the past, placing these departments at the forefront of your business boosts innovation and increases transparency.

Source Strategically. Continually evaluating and improving your purchasing activities can improve your speed to market, streamline your network of suppliers and ultimately increase your bottom line. Remember to work smarter, not harder – use the resources and technology available to you to make this process easier and more efficient.

What Is Tail Spend And How Can We Manage It?

Tail spend is software, professional services and business purchases that are outside the typical large, ongoing purchases that organizations make. These purchases are often too small to go through procurement and are not frequent enough to be included in cataloged systems. An easy way to think of it is the 80 percent of suppliers that represent just 20 percent of an organization’s spend.

When you boil it down, the most difficult aspect of tail spend management is lack of data visibility. This can happen for a number of reasons such as procurement and contract management running on separate systems within a company, siloed subgroups within the same organization (when they may be using the same vendors and resources), high numbers of vendors and decentralized policies.

How can you better manage this?

Identify Tail-Spend. Since tail spend can include anything from maverick spending to misclassified purchases, it’s important to define what it is and where this is happening within your organization.
Streamline Internal Processes. In order to save money and gather relevant data it is imperative to have centralized processes and that they are enforced. Streamlined processes mean better payment terms with frequent suppliers across departments and can lead to more strategic buyers within your organization.
Use Data. Once you’ve streamlined your internal processes, organizing, classifying and analyzing spend data will lead to greater spend awareness, informed purchases and decisions.

One study conducted by The Hackett Group estimated that 7.1% savings on average can be achieved by better managing tail spend, this means that some of your biggest savings can ultimately come from your smallest purchases.

If you have questions about effectively managing your tail spend, please email FairMarkIT CEO Kevin Frechette at kevin@fairmarkit.com.

 

Can We Use Data to Improve Decisions?

If you frequently read the news (or follow FairMarkIT on LinkedIN, Facebook or Twitter…wink, wink), chances are high that you’ve recently seen news sources claiming that data is the new oil, check out Economist, Huffington Post and Fortune to name a few.

The bottom line of these articles is that with the advent of smartphones, the internet and everything from smart TVs to smart cars, data is created at a rate that would have been unfathomable even 15 years ago. Not only is data plentiful but it is high quality and extremely valuable. With data we can learn anything from buyers want, to predicting the unemployment rate and estimating sleep quality from smartphone sensors.  Data impacts what ads you see on Facebook, how companies compete and even the way we park our cars.

So if we’re convinced that data is the new oil, what is an easy way to incorporate this hot commodity into your business strategy? By relying on data instead of your gut to make decisions.

With data-driven decisions you have the ability to be smarter about your customer profile or team, learn what has (and hasn’t) worked in the past and save money in the long term due to more efficient processes. With more data collected and the capability for advanced analysis, decisions can be made with less emotional human error and ultimately drive better outcomes.

Ready for a real world example of how a data-driven decision could have prevented a major crisis? It was recently reported that IMF and the G20 finance executives admitted that they didn’t have the data necessary to make smart policy decisions to avoid the Global Financial Crisis. Just think about how different the past 9 years could have been if international leaders had the data they needed.

So whether you’re in doubt about big decisions, like what software to procure for your team or the ideal neighborhood to buy your next home. Or small decisions, like which route to take home from work, remember that data is an extremely valuable resource and it should not be absent from the decision making process.

 

The Procurement – ROI Relationship

Software Procurement and The Bottomline: Why Quantitative Price Information is Making a Comeback

So let’s talk about Return on Investment (ROI)…but before we scare off all the non-finance majors reading, we want to note that when we talk about ROI in the procurement context it is about the actual value of the procurement department within the greater context of a company. Don’t worry we would give you fair warning before diving into a Tuesday afternoon math lesson.

Beyond traditional cost savings, procurement provides savings in the way of innovation, efficiency and risk management. Harvard Business Review reported that the value of increased business efficiency alone through strategic sourcing could drive ROI up 400%. Additionally, resources like FairMarkIT give internal decision makers the ability to easily and quickly compare prices and quality of options, ensuring that you get the best quality technology at the lowest prices.

According to the Hackett Group, top-of-the-line procurement organizations save, on average, 22% on labor costs. Additionally, they require 29% fewer full-time works to provide the same quality (or better) service as their peers. For a standard company with around $10 billion in revenue, achieving this standard of performance in procurement could mean as much as $6 million in potential annual savings.

To summarize our math-free lesson for the day,  an efficient procurement team supplies greater productivity, strengthens collaboration, can minimize risk and drives long-term ROI to keep the business competitive.

 

What Procurement Teams Really Do

 

Here at FairMarkIT, we’re always talking about procurement – but what do procurement teams do? Strictly speaking, it is the sourcing of products and related services, the negotiation and strategic selection of those products, and delivering those goods and services to the internal department within the company that plans to implement and distribute what has been purchased. Pretty wordy, huh?

Given the complexity of the department, people often confuse it with purchasing, though they are separate teams with different sets of responsibilities. To put it simply, procurement is often the big umbrella that purchasing lives under, when a company needs a new product it will be procured and then purchased. Purchasing deals with the process in which goods and services are ordered and then paid for, which is more of a financial function.

In world class companies, procurement is viewed as a strategic function working to improve the organization’s profitability and productivity. The best leaders and managers not only ensure their organizations are getting the best deals and prices for their purchased products and services. They also guarantee they are using the best-in-breed tools, to enable their entire company to perform better.

The function can vary greatly across industries, often in government or other public sector organizations, procurement is incredibly mindful of its fiscal responsibility and accountability to taxpayers and the use of their funds. These departments in public sector organizations are under intense scrutiny, and must follow very rigid rules and processes. To get a better idea of this, check out Alaska’s procurement department’s responsibilities.

So bottom line, regardless of industry, what do procurement teams really do?! They are a strategic function. They source, negotiate and delivers goods. They empower their company to function more efficiently and effectively.

 

Why You Should Invite More Vendors to Your RFPs

As your team prepares to release an RFP (request for proposal), inviting more vendors will benefit your procurement efforts as well as your company as a whole.  More potential vendors drives greater price competition and the ability to leverage and negotiate proposals, leading to more aggressive proposals and fiscally responsible solutions. While you’re in the process of negotiations, it’s important to be transparent with vendors and avoid bluffing, which is unethical and generally sours the relationship. It’s easy, as a result of  being lazy or wanting to move quickly, to skip the extra step of reaching out to more vendors (in order to retain more RFPs). But in all honesty, it’s not nearly as painful or time consuming to invite more vendors to an RFP as you might think. In the end, the most important thing is for you to be a good client during the negotiations because ultimately, the best relationships between vendors and buyers are partnerships.

When you invite more vendors, be sure to keep the following tips in mind:

  • Strong RFPs, by nature, make more work for the potential vendors, if one of these vendors thinks that winning is unlikely, they may not submit a bid. So be sure to invite strong, prequalified potential vendors.
  • RFPs are a waste of time if the responses aren’t thoroughly evaluated, when inviting vendors keep in mind that you should invite as many vendors as responses you are willing to evaluate.
  • Give your vendors sufficient information in your RFP (like demographics and plan details) so they can give you strong, thorough answers.
  • Be sure to ask specific questions so you can easily compare vendors side-by-side. Try not to feature-compare, rather, solution compare. In other words, with more complicated, expensive technologies and tools, look at the problems you’re trying to solve and how the various product options help you solve your problems, versus getting into non-strategic feature comparisons. As a procurement professional, the core purpose of your job is to solve problems, not to “buy stuff.”

Ultimately, inviting more vendors to respond to your RFP creates more pricing competition and transparency, and will lead to higher quality proposals as well as better technology for you and your company.

 

Procurement is Overlooking a Valuable Asset

There are dozens of companies offering consulting or software that promises to help you “save big” on your procurement efforts. While a handful of these consulting firms and tech companies offer valuable services and technology, they can be costly, to say the least. And the rest of them are quite frankly a scam, or waste of time and money. If you’re at a small company or a large company that doesn’t invest in procurement, chances are you may not be able to afford these solutions and services. So what can a procurement professional do to get a leg up and save money for his or her company, while not spending ridiculous amounts of money?

Two words: “Look Within.” No, we don’t mean in the squishy, metaphoric, yoga-doing, meditation-obsessed kinda way. What we mean is that you should be leveraging your coworkers and internal teams in order to help you (1) Figure out what you should be buying (just ask!) and; (2) Chances are, someone on your team probably has information on the pricing scheme of a certain technology/solution you’re interested in procuring.

Your first issue to address is figuring out what you should be procuring for your team. This can be tricky, especially if you don’t fully understand the technical and business needs of your team,  which is even more reason to leverage them (i.e. talk to them or observe them)! As a procurement professional, you need to be as much strategic in your day-to-day activities as you are tactical. Planning ahead and understanding how the tools you procure will affect and influence each and every employee at your company will make you more effective and valuable. In order to be more strategic, you need to connect with your customer. Unlike your company’s customer, your customer, as a procurement professional, are the employees of the firm. You serve them. So, in order to deliver the best tools and solutions to them, you need to understand their problems, wants and needs first. The best way to do that is by talking to them. Stop reading articles or theorizing about what they need – the answer may be sitting right next to you.

Now let’s address the second issue: figuring out pricing and price comparison for a specific solution or tool you plan to procure. There simply aren’t enough (if any) good price comparison tools for procurement professionals, at least when it comes to software solutions. So what is one to do in collecting pricing data before making a purchase to ensure you’re not overpaying for a technology? You can’t ask the vendor out right. Google isn’t helpful. So what do you do? The answer is again, look within. Chances are, someone at your company has either used or even procured the technology you’re looking at (especially if the solution was proposed by an employee). So why not go to the departments or individuals within your organization and ask for pricing data on software solutions they’ve procured? Even if they don’t know the exact technology, pricing for comparative products will suffice (and may be even more advantageous to have when you’re trying to negotiate a price down).

The bottom line is: don’t underestimate your internal teams and departments as valuable sources of data and information. Underutilizing them is a wasted opportunity and leads to money loss and wasted efforts. So go forth, take a stroll around the office, send an email and make your own company your secret weapon for procurement.

 

Why Your Company Should Invest More in Procurement

Other companies are investing in their procurement teams.

Just because your neighbor or competition is doing it, doesn’t mean you should too. However, in this instance, copying leads to advantageous outcomes for you and your company. If a large swath of companies, particularly the fastest growing ones, see the importance of investing in their procurement and sourcing teams, it’s worth asking why. You may not understand all of these companies’ reasons, but just acknowledging and recognizing the trend (and doing something about it!) puts you ahead of the curve.

Procurement has the power to save your company major money and time.

If you have a world-class procurement and supply chain team, it is almost certain that your other KPIs are looking great as a result. How can this be? If you think about it, one of the most integral parts of procurement’s role within an organization is to find and source the best tools, technologies, and processes for your organization. If procurement is truly doing their job well, then that means they will have procured technology and tools that are efficient, effective, and useful, all the while sticking to the budget. With better tools and technology, your teams are enabled and empowered to work faster and better, which increases output and production, as well as saving everyone at your company time and money. It’s a win-win-win.

Bad procurement or poor procurement mistakes can lead to major losses in time and money.

On the other side of that, a bad procurement team has the potential to do a lot of damage. They can get in the way of everyone at your company. A bad or poor performing procurement team means that they either don’t understand the business’s needs and/or do not source the absolute best and most cost effective tools and technologies for your company. We all know what the consequences are when we don’t have the proper tools to do our jobs- we struggle, waste a lot of time, and are generally much less effective than if we were better enabled with a better tool kit. Employees who are not equipped with the best tools to succeed will not be able to produce product and output in a valuable and efficient way, costing you significant losses in revenue and time. Tools can either speed up an organization’s productivity and effectiveness, or slow it down significantly. Procurement lies at the heart of all this as they are in charge of finding the best tools and technologies for your team- if procurement isn’t empowered, the rest of your organization will suffer. A bad or poor performing procurement team is more dangerous than most would expect, which is why it is so important to invest in them. A small investment has huge implications.

Procurement affects the entire company.

As evidenced above, procurement teams affect the entire company because the tools and technologies they procure and purchase affect employees one way or another. Often times at smaller organizations, there is no official procurement team, and everyone is left to finding and using their own preferred tools. This may work well for a startup or small organization, but if you’re looking to scale or become a world-class company, it just won’t cut it. Eventually, you will need a procurement team, and that person has the power to make your team more productive or slow everyone down. Obviously you want the former, but the only way that can happen is if you find the best procurement professionals and equip them with best-of-breed tools so that they can find the best tools and solutions at the lowest prices.

Procurement could be your strategic advisor, and secret weapon.

Many world-class companies not only realize the overwhelming effect procurement has on their entire company, they also know that procurement, if done right, can be their personal and company’s secret weapon.

 

3 Things Procurement Professionals Can Do To Become A Better Negotiator

3 Things Procurement Professionals Can Do Immediately to Become Better Negotiators

For many technology and procurement professionals vendor meetings can be confusing, drawn out and downright frustrating. Here are three tips that will immediately help your team become better negotiators:

1. Let them speak first. Often times, we have a tendency to get really excited and want to speak first when we’re on the first call with vendors and companies offering solutions to our problems. This is because we are eager to tell the vendor what our problems are and how we’re looking to solve them. While it’s fine to share the problems you’re looking to solve with the vendor, don’t tell them how you want to solve your problems. Let them do that for you- in fact, that’s their job! A good salesperson who is capable of solving your problems will be able to pinpoint the issues pretty quickly. By speaking first, and sharing your situation with the vendor, you are taking control of the conversation and ensuring it starts off with you and your company’s problems at the forefront.

2. Don’t talk about the product, talk about the problems you’re looking to solve. When talking to a vendor, it’s easy to want to narrow the conversation down to how their products relate to your problems (in fact, that’s what they want you to do). In order to ensure you’re getting the best solution to your problem (there are often times many great software solutions to one company’s problems), you need to make sure you’re starting and ending with your the problems you’re facing when talking to the vendor. Make the vendor tell you how they’re solving your problems. Don’t let them dictate and make up issues for you. Many sales people, especially more junior but smooth sales people, can easily make you believe you have a problem that you actually don’t have. Be aware of this.

3. Get as much information as possible. Knowledge is power. Coming to the negotiation table with vendors and not knowing enough about their products, what they do, who their competitors are (i.e. your other options), and at their ASP (average selling price) is can severely hurt you. Without proper information, you won’t be able to adequately advocate for yourself and ask for the right things (like adding this feature or service into the bundle for free). Highlight pricing being a big blind spot for procurement professionals – it’s a blind spot because it’s hard to find, but doing your research is worthwhile. Try calling up friends in the industry who have used the technology or using tools like FairMarkIT.