Effective Procurement Strategies – how to avoid becoming a statistic.
Effective Procurement Strategies – how to avoid becoming a statistic!
According to the National Outsourcing Association of the UK, over one in four outsourcing agreements don’t meet expectations of the client and a quarter of all relationships fail in any given two-year period. That’s a pretty shocking statistic for businesses that now see the outsourcing of services to specialist suppliers as the norm.
The reasons for this breakdown in relations is often down to poor planning, insufficient due diligence, selection and design, misalignment of expectations, weak or no contract management and governance, inflexible structuring and contracts too biased to the outsource provider. On top of the resource-hungry process that is procurement, the impact of a failed outsource relationship on the business will be an increase in risks, high costs, wasted resources and barriers to any future sourcing initiatives.
In these economy-driven times where businesses are looking for every option to drive down costs. Effective procurement has established itself as a key mechanism for getting more for less, as well as mitigating risks and creating value. It is therefore vital for businesses who want to remain competitive to have a robust sourcing strategy in place which will enable them to select suppliers with whom they can develop long-term collaborative relationships based on trust.
Businesses looking to go out to tender need to start thinking about their options around two years before their existing contract comes to an end. Tender processes are lengthy and take up a huge amount of time and resource which is nearly always under estimated, if you leave it too late your existing supplier will realise that you are on the back foot and have no choice but to extend the current contract and will be able to squeeze you on terms if they have the upper hand when it comes to negotiations.
Typically, a best practice procurement process will look something like this:
1. Understand your needs
Get to grips with everything about the service or product being outsourced: this means definitions, usage, what has been specified and why, current and future needs and trends.
This is also the point where you need to identify stakeholders and decision makers who will be involved in the processes from all parts of the business.
2. Assess the market
Look at the supplier marketplace and run supplier assessments in order to find alternatives to existing incumbents. Also think about whether you want to invite your incumbent supplier to tender for the new contract, either way you will need a strategy to manage the incumbents service levels throughout the procurement and possible transition to a new provider. Understand the key supplier marketplace dynamics and current trends. Take a view on the key suppliers’ sub-tier marketplace, and analyse for any risks as well as opportunities.
3. Prepare a supplier survey
A survey will help you to evaluate potential supplier capabilities to meet your requirements. This is a quick identifier at the start of the process to assess whether your requirements are feasible and can be delivered by the suggested supplier base. This is also a mechanism to encourage the right ‘type’ and scale of suppliers to respond to you.
4. Building the strategy
Your sourcing strategy will encompass the previous three steps, but will also need to cover:
- How competitive the supplier marketplace is
Are you a strategic account for your potential service providers? Dynamics will change as you move onto a bigger and better service provider and smaller accounts are less likely to be able to leverage relations and shape service delivery. It is better to get an ‘A’ team from a smaller provider than a ‘Z’ team from a larger provider.
- How supportive your organisation’s users are to testing incumbent supplier relationships
A sourcing team has two sets of internal stakeholders: the people who use the things that are bought, and the executives who manage overall costs. Users will be happy to embrace a new service provider as long as the service itself is not disrupted and the relationship with the incumbent does not deteriorate through transition. Those managing costs will be happier if costs are improved but they will also be concerned about service quality.
- Getting the most out of your supplier
Collaborating with your supplier is a key area that needs to be explored in order to grow a successful mutually beneficial relationship and avoid becoming a statistic. You might want to look at ways to collaborate with your supplier in order to:
- Reduce complexity and in turn increase productivity
- Create corroborative process improvements that reduce the cost of doing business
- Change the way the relationship is structured, e.g. invest in supplier operations to guarantee access to supply, new technology or process improvements
- Become a reference site, or case study
If the supply base is competitive, you can harness those forces to leverage better pricing, SLAs or terms. If you don’t have any leverage over your supply base then you are relying on good faith that suppliers will share new approaches and innovations with you.
5. SQs, PQQs, RFxs & ITTs
Where a competitive approach is used, a request for proposal or bid will need to be prepared (SQs, PQQs, RFI, RFP, RFQs, and ITTs). This will define and make clear the requirements to all prequalified suppliers. It should include product or service specifications, delivery and service requirements, evaluation criteria, pricing structure, SLAs, KPIs, Service Credits, Benchmarking requirements and financial terms and conditions. A communication plan should also be implemented at this stage to attract maximum supplier interest. Ensure that every supplier is aware they are competing on a level playing field. Again, think about whether you want to invite your incumbent supplier to tender and do it for the right reasons: it’s an expensive process to run tender and even to respond to (which we are fully aware of as we do both for clients), so it will only deteriorate relations further if you have no intention of considering them as a proper contender.
Once the SQ, PQQ, RFx, or ITT is sent out to all potential suppliers, make sure they are given enough time to respond, or the opportunity to reasonably request an extension. You should request that potential suppliers confirm their intention to respond, to ensure at the end of the process you do not end up with no responders, even follow-up messages should also be sent out to encourage a greater number of the ‘right’ type of responders.
6. Selection process
This is where the negotiations come in. The sourcing team need to apply its pre-determined evaluation criteria to the supplier responses and if you need more information then ask for it. Manual and electronic tools can both be used for this purpose, the key is a high quality questionnaire.
Think about the long term goals and the collaborative piece mentioned earlier; cost savings are not the ‘be all and end all’, if we look back to the opening statistic it’s clear that the relationship between a supplier and client is at the heart of a successful contract, and if you are looking to drive innovative practises and get ahead of the competition then this should be your focus over pure financials.
7. Transition and implementation
There will be a period of transition while the service hands over from the incumbent to the new supplier. Make sure that all parties are well communicated with and understand their role and responsibilities. Ensure any incumbent transition and exit costs are fully understood and agreed in writing. Inform all users of the changes and closely monitor the new supplier’s performance during this period to ensure that it lives up to expectations.
Negotiating contracts with new or existing suppliers is a long and resource-hungry process. Engaging a procurement consultancy like eXceeding can help to provide a fresh perspective to sourcing challenges. They also tend to have in-depth current market knowledge, supply management expertise and enviable project management skills. In a world where there aren’t enough hours in the day for the day job, it’s hard to think how most organisations can develop and maintain an effective sourcing strategy without a pre-existing specialist team. eXceeding was founded on the principle of providing impartial and unbiased services to businesses to help them achieve the best services and solutions for their outsourcing needs, seeking to reduce overall spend without reducing quality of service or finding the right provider for your requirements.
For further information on our procurement services please visit our Procurement Strategy Page.