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How to maximise procurement strategy outcomes

By 2nd November 2018 No Comments
maximise procurement strategy

A frequent topic that comes up when we discuss commercial strategy and tactics with business owners is how they can maximise procurement strategy outcomes or general strategic outcomes in their businesses. To much of the world, procurement is seen as a process rather than a method by which strategic choices are brought about that maximise procurement strategy outcomes. In our view, this perception needs to change first. No pork, no sausages regardless as to how good the sausage machine is (the procurement process). The second point is that the process will only maximise procurement strategy outcomes if the right team is working to achieve the desired results. A bad process will still achieve some positive results if the right team is working with the right strategy.

What might this mean in the real world when businesses try to maximise procurement strategy outcomes?

How buy / supply dynamics impact on attempts to  maximise procurement strategy

Picture this scenario. A routine commercial transaction is about to take place. The buyer knows what they wants and the supplier knows what it has to offer. There is what economists call near perfect knowledge. How can buyers successfully manoeuvre negotiations so that they strengthen their position, contribute to an efficient procurement sourcing system and avoids the pitfalls and traps of clever salesmanship? It’s a question which many companies face and struggle with. Commiting to ensuring staff in these scenarios have access to professional development training is a realisation many come to having learned the cost of not doing so at the coalface of commercial negotiations. Procurement training can heighten commercial awareness and help to equip key staff with the skills they need to successfully negotiate contracts.

An approach to maximise procurement strategy outcomes

First and foremost, key staff need to be sure of their positions and priorities. The eventual agreement on price, quantity, distribution procedures and more is likely to be dependent on the respective skills of the buying and selling counterparties involved in the procurement process. Different and evolving sales techniques – new and old – can make the process dynamic and easy to manipulate, from the perspective of both the buyer and the seller. Consequently, from a buyer’s perspective, the adoption of a future-oriented strategy can be key to identifying and then counter-acting sales techniques being used to exploit the buyer’s position.

One such technique, for example, is known as ‘spin selling’. It has been internationally popularised as a method of winning bids and maximising the profits of salespeople dealing with companies and their procurement needs. It is particularly prevalent in the sale of complex IT systems and outsourcing solutions (i.e. multi-million euro transactions rife with misselling stories). Spin-sellling focuses on engaging human emotions and the buyer’s vulnerabilities by personalising the negotiation process in a way which, uncoincidentally, has a tendency to benefit suppliers. It behooves us here, out of deference to the confraternity of procurement professionals to point out the “buyer” here is often a “business sponsor and budget holder charged with solving a problem” rather than a seasoned procurement professional used to hearing this kind of palaver.

In spin selling, vendors ask about the business generally first before asking about the company’s key issues and the implications of these problems before ultimately offering a solution which seems too good to be true [SPOILER ALERT – it probably is]. Discipline in the process is key to ensure the business is not enticed into buying what might politely be called a lemon. Procurement training can help key staff understand the importance of process and discipline and convince the business to stick with the process being used to make sure the right decision is taken but the company. When everyone is bought into the process, it is easier to convey a cool, calm persona during negotiations, to avoid discussing price before a deal has been confirmed and avoid usage of the words like “when” instead of “if”. Game theory can also be used depending on what is being bought to really shake the trees. We have articles elsewhere on this site on the results game theory can produce from suppliers.

 

The positive impact of strong procurement sourcing strategies

Also key to companies maximising the efficiencies they can gain from good procurement sourcing is a commitment to maintain a strong, respectable brand and reputation. Not only does the association of reliability greatly benefit those seeking to supply a service when winning bids, but it also helps buyers with their procurement sourcing. In simple terms, salespeople are less likely to attempt their typical tricks and techniques on a business known for its efficiency and robustness in the areas of procurement training and procurement strategy. We know this to be the case with, for instance, some public sector bodies who are notoriously tough negotiators.

Multiple studies show the best time to take steps to enhance a company’s chances of succeeding in the procurement process is prior to negotiation through the laying of strong foundations. This is infinitely preferable to having the rectify issues later creating a position of weakness. As they say in politics when you’re explaining you’re losing. Agreeing to a strong negotiating position with key stakeholders upfront, including red lines and walk away points, before negotiating with suppliers is one example of a technique which can be advantageous.

Although it is often complex and challenging, procurement – as both a buyer or supplier – is not quantum physics. Procurement is, for the most part, about following a series of systems and processes “to identify, source and manage contracts”, according to Matthew Sparkes, head of financial services at the Crown Commercial Service. This principle particularly holds true when it is crunch time i.e. a deal is about to conclude and pens are about to be put to paper.

Suppliers have an opportunity to make a virtue of not using enhanced sales techniques to differentiate themselves from those that do. If suppliers were more aware of the perceptiveness of procurement professionals changes in approach would ensue. Businesses that fail to heed the need to take a step back and strategise first, before deploying the right team with the right skills to run the process, run the risk of shelling out needlessly on solutions they could have procured for less whilst achieving their desired outcomes. A company cannot maximise procurement strategy outcomes without doing this.

 

Using game theory in procurement negotiations