How does bureaucracy affect procurement? Technology can liberate procurement from bureaucracy. Or it can imprison it.
The first mile of the supply chain is sourcing. This is a process to identify the right solution from the right supplier at the right price.
Once we have completed this step, we must negotiate a contract and evaluate subsequent performance.
Companies purchase goods and services to solve problems. Reverse auctions in the form of “Requests for Proposal” or “Requests for Quotation” are the most common way to source solutions.
Reverse auctions emerged as a business process to combat “waste, fraud, and abuse.” By convincing multiple suppliers to compete, the buyer can see competition on price and competition on solution. This ensures that they pay fair value for the optimal result.
At least that’s what the theory says.
In truth, reverse auctions often fail.
A failed auction is one in which the buyer fails to pay fair value for the optimal result because of insufficient competition on price and solution. In a failed auction, the best outcome isn’t an option. It’s not on the menu. In a failed auction, the best price is unavailable.
Bureaucracy is the primary reason reverse auctions in a sourcing context fail.
Bureaucracy slows the decision-making process. Bureaucracy imposes costs on suppliers for which they receive inadequate compensation. Bureaucracy shifts risk to suppliers.
Bureaucracy puts up walls between the buyer and the suppliers making it more difficult for one to understand the needs and constraints of the other.
Bureaucracy chases away suppliers.
Bureaucracy, for all its intent to protect the buyer, ends up hurting the buyer by limiting competition far more than it protects the buyer from bad actors.
It’s even worse when we consider downstream functions.
Bureaucracy takes up so much time and resources that it weakens vendor monitoring and contract performance management. It could be the case that a supplier passes the sourcing gauntlet only to fail to live up to its promises. It often is. Is the buyer paying enough attention to performance? Does the buyer know if they actually obtained value for money?
Of course, there are ways to mitigate bureaucracy, at least in theory.
In theory, ERP systems standardize operations, automate repetition, streamline processes, and promote internal collaboration. These systems contain modules for sourcing and procurement. Often, these are standalone solutions the ERP vendor bolted on.
Rarely do they obtain this Weberian fantasy of administrative perfection.
In practice, they are painful to implement. They require extensive training. They are still difficult to use. They are costly to carry, typically with subscription fees.
The only people who use procurement ERP modules and source-to-pay systems are the procurement staff. These systems do not promote internal collaboration; they kill it. How many people from the C-Suite or from product are spending time in the ERP sourcing module? How many of them even have seat licenses?
Most current ERP and S2P systems bake bureaucracy into their code. Use these systems at your peril, buyers. It blocks the information flow between buyer and supplier.
Engineers program systems based on a set of assumptions. In the case of ERP and S2P systems, these assumptions span the business process.
When you buy an ERP or S2P system, you are buying the assumptions the engineers encoded. You are outsourcing the decision-making process, in a sense. You have given up some measure of control over the purchasing outcomes you obtain.
Too often in these setups, the potential for collaboration and innovation and convergence on mutually beneficial outcomes diminishes significantly.
The most common alternative to an ERP system is the combination of email and spreadsheets. Using these tools is akin to running a procurement process manually.
With email and spreadsheets, we can be certain that there is no so-called “data lake” of structured, pre-processed, and timely data on which to base our decisions. Instead, there are loosely-connected “data pools” of varying quality, consistency, and temporal relevance. People aren’t sharing data, at least not at scale. Nobody is building analytic tools with data stranded in email and spreadsheets.
Email and spreadsheets is where data goes to die. It is where data lies dark and fallow.
The more bureaucratic the process, the more likely it is that we are under-utilizing this valuable intelligence, even as we alienate our supplier base.
The most insidious consequence of bureaucracy is the imposition of an adversarial tone to the conversation between buyer and suppliers.
It is bad enough that each side operates with incomplete information about the other, making assumptions about needs or capacity and capabilities.
Treating suppliers as competitors in negotiation makes things worse. Doing so increases risk.
During the Pandemic, when supplies tightened, vendors gave preferential access to customers who had been collaborative partners in the pre-crisis period. People who treated them badly when times were good got what they got.
Bureaucracy is the enemy.
Ironically, only technology can provide release.
A system or a platform that does not encode these assumptions or suffer these constraints is the only way out.
The ideal approach would focus on three things: data, collaboration, and simplicity.
Data needs structure, accessibility, and utility in providing market intelligence. It needs to be something that people want to use because they need it to make better decisions.
Collaboration means that buyers and suppliers work together to dissolve assumptions. Buyers get the best solution for their problem. Suppliers sell to customers who will be long-term partners, confident that the buyer will be happy with the product they purchase.
Simplicity means that buyers and suppliers are attracted to one another. Simplicity eliminates friction.
This is what we have built at EdgeworthBox and this is why we have built it. At EdgeworthBox, we believe that bureaucracy is the enemy of progress and efficiency. We focus on overcoming bureaucracy with data, collaboration, and simplicity. We decided to go after sourcing first based on our experiences as a supplier. Our sourcing platform delivers tools, data, and community that drive better purchasing and faster sales.
With EdgeworthBox, buyers control the process.
Come join us. Buyers and suppliers get free access to tools, data, and community. Buyers pay small fees for hosting and executing RFPs and RFQs, fees that are more than compensated by the lower transactions costs and lower opportunity costs from purchasing the right solution from the from the right supplier at the right price. We’ll even help you find suppliers. You can see more in this short video.
Or, if you’re curious, let’s set up a time to speak.