During the latest and final webinar in the 2017 BravoSolution Real World Procurement Series “Delivering Value (Not Just Savings!)” Peter Smith, Editor at Spend Matters UK/Europe, defined exactly what “procurement value” means. Peter spent time teaching the audience how to best explain procurement value to senior stakeholders, and demonstrate how procurement actions contribute to the wider success of the organization and its competitive advantage. He also spoke about why every spend category should be considered separately, and what that means for each in terms of value.

Following the webinar, Peter engaged with the audience in a live Q&A session and answered real-world procurement questions, like how to define and measure optimal procurement solutions and their success, and how to determine the number one objective for your procurement organization.

Q: Is there any value in expressing cost reduction in terms of equivalent value? A term finance types can understand.

A: Talking about what we’re doing – what we tend to see as procurement results – and turning them into measurements for the organization. Often, the CFO’s a key person turning it into language they understand and can relate to.

In the 90s, when I was the European procurement director for Dun & Bradstreet, I saw the COO from Dun & Bradstreet present at the CFO’s conference. And rather than saying “We’re going to switch to the D&B deals and save $10 million a year,” she said “So we’re going to save $10 million a year. And as Gartner trades on a PE, profit earnings ratio, of 25 or 30 or something, that converts to an additional $300 million of shareholder value.” And everyone in the room went “Wow. That’s incredible. $300 million shareholder value created by using some D&B procurement deals.” And for some, it was like the light bulb moment. I thought then that there are different ways of presenting what we do and some of them are a lot more powerful than how we normally do it in procurement.

Another way of doing it is, how much more revenue will the organization have to get to equate to the amount saved?I’m very interested in how we can get better at expressing the risk management side of what we do in procurement. We need to think about getting better at expressing the benefits of risk management in a more quantified way. I think sometimes, looking at trying to quantify the current supply chain risk picture, what’s the probably of certain things happening? What would be the cost if they did happen?

One final quick example. There was some work that had been done in our national health service at a big hospital. Procurement had done some really good work and saved some money, and taken some cost out. A man stood up at a conference and he said “We saved two million dollars this year, and that translates into that we can do an additional 73 heart operations. And that probably means we saved 41 lives.” And you thought, “wow, that’s a very powerful way of expressing what it is that procurement does.”

Q: In a hybrid value proposition, price, service and risk, how do you define and measure the optimal solution?

A: I think there’s a parallel there with how we evaluate tenders. If you are in an organization that has a relatively formal way of evaluating tenders, it’s evaluated in a complex, but structured manner. You have different evaluation criteria, which could be cost, service, risk, and you set weightings for these factors.

You can look at that and say “This company offers a million dollars and we score their services nine out of ten, and we score the risk as whatever. And here’s another company that’s offering $800,000, but their service is this.” And there are ways of combining that to come up with an overall score that tells you which has won the contract. So I think you can apply something similar here.

There are ways of trying to get people to quantify by somebody saying “Well, quality’s more important than price to me.” How much more important is it? If you could have 20% less quality for half the price, would you take it?

It’s not an easy thing to do, but I think you can start to work with your CFO or your stakeholders. Some of this comes back again to the organization’s objective to say “Are we most concerned about cost reduction? Are we prepared to take a higher risk to get that lower price? Or are we more interested in service and we want to put more weighting on that?” I think the answer’s probably something around decision theory and decision analysis.

Q: Isn’t it the job of the budget holders to develop the specification, and then procurement buys against that at the best possible price? Lowest cost, or cost reduction, is really the number one objective for procurement?

A:. To me, there’s a couple of issues here. The first is that for many spend categories, I would have expected my category managers, like when I was a CPO, to be experts in that category and experts in what’s happening in the market. And certainly in some areas, more so than the budget holder. If I take management consulting, and it’s a category I wrote a book about a few years ago, most budget holders engage consultants occasionally. You can’t expect them to be experts in that market. If I’m in an organization with a big consulting spend, I expect my professional services category manager to be the expert and to know who the new companies are and to know who’s performing well on transformation, who’s very good on IT implementation, and so on.

I don’t think it’s simply a question of taking a spec and going out and beating suppliers over the head. I think it’s about working with the budget holder to help them develop an appropriate specification, be able to say “Well, if that’s really what you want, you’re going to really restrict the market. If you can open it up a bit, we can bring some other suppliers into the tender process,” and so on.

My second argument against that approach is that it sort of works if you’re buying skim milk powder, which has a very set, definite specification. As soon as you’re buying complex services, there is always flex in the specification once you get into the negotiation and contracting process. There’s always some movement, there’s always a case of the supplier saying “Well, okay. If you want it 20% cheaper, that’s fine. But I can only do that if we change this, or we change that deliverable a bit. Or we downgrade that a little bit.” You’re rarely negotiating around an absolutely fixed spec once you get into more complex products or services, actually.

There’s also the question of confidence. If I put out a spec for some marketing work and I’m getting bids around $100,000, and somebody comes in and says “Hello, this is John Smith from Arkansas. I can do it for $73.” Do we give John Smith the business? Because that’s sort of how it goes if I’m just price focused. No, we look into who is John Smith? What’s he done before? What’s his track record? Is his company sound? Does he know what he’s talking about? It’s not as simple as price.

Q: Isn’t it really difficult to measure the return from marketing spend and even harder for something like consulting?

A: Yes, it is. It amazes me though that some firms throw huge amounts of money at marketing in areas like digital media now, and adverts on YouTube and Google. They have no idea whether it’s real people watching them, or whether their adverts are going out next to horrible videos. I think that’s a failure not particularly the procurement people, but the whole organization.

It’s not easy to measure return on marketing spend. If you really have no idea what it is, then perhaps you shouldn’t be spending the money at all, or you should be going back to zero-based budgeting.

Consulting is probably even harder to measure. Part of the category management process of consulting is that it has to go through a business case process. Even if a budget holder has a budget to spend on consulting, that doesn’t mean they can do what they want with it. Part of the procurement role is to work with the budget holder to demonstrate why that consulting assignment is going to bring value. And if the budget holder says “I think I want to spend a million on this assignment,” then there’s a number of questions. What’s the value? What are the outcomes, the outputs going to be? Can we see that potentially that is worth more than a million?

Then, the job of procurement is to say “Well, okay. Does it have to be a million? Can we get those ad puts for less than a million? Or, if we are going to spend a million, can we get more from it?” If you really have no idea what return you’re getting on a spend, maybe you need to do a bit of research before you throw your money at it.

—————

This Q&A session has been edited and condensed from the final live session of BravoSolution’s 2017 Real World Procurement Series, an established international series of online briefings designed specifically for procurement professionals, delivered by real-world experts. To listen to the full presentation on “Delivering Value (Not Just Savings!)” click here.