When discussing technology used for strategic sourcing such as RFPs, much of the conversation boils down to the solution itself. How much does it cost? How difficult is the implementation? Will it integrate with the ERP system? Will this solution help us get value-for-money (all too often defined as the cheapest solution)? Is the procurement aligned with the organization’s IT strategy? Have we balanced cost, quality, and risk in picking the good or service we end up buying?
All of these questions (and the philosophy they represent) revolve around the transaction of acquiring the technology and the solution These questions mainly address the requirements of the procurement department. Indirectly, they address the question of how the procurement department fits into the organization chart. How will the C-Suite see procurement?
They implicitly ignore the end users, the ones who actually translate “strategic goals” into tangible action.
This is entirely the wrong way around. In discounting the end users, the ones who actually translate “strategic goals” into tangible action, the buying organization sets itself up to fail. It is a well-established fact that user-adoption is one of the primary reasons for the failure of technology-centered transformations.
Procurement’s customers are the people who are the future end users of the acquired solution. These are the people procurement should serve in the same way that the company focuses on its own customers.
If we are buying a solution that we intend to use for the next five years, the primary consideration should be the value created over the next five years. The bulk of the return on investment (ROI) comes from this, not from negotiating the price down with the vendor by a couple of percentage points.
The real ROI is going to be determined by those who use the solution, the intensity of their engagement with it, and the outcomes it generates that the organization would not obtain otherwise.
If procurement buys a tool that nobody uses, it’s a failed outcome. It is bad for the organization because they have wasted money. It is bad for the end users because they have to revert back to their old ways or produce kludgy ways to work around the newly acquired good or service. It is bad for suppliers who had hoped to build a lasting relationship.
It is a massive misallocation of resources no matter how compliant the process is.
The ROI of a product nobody uses is -100%.
Early-stage companies focus on building and determining what works and what does not. The nascent entity strives to improve features in their own product offering that the customers like and kill those that the market does not. This is the explore phase. The firm concentrates on determining what the customer needs the most and then works on making the customer successful in the most-efficient manner. When it comes to buying goods and services, procurement talks to internal end users and invests the time and effort to determine their exact requirements. While the procurement approach may be transactionally inefficient, using pen-paper, spreadsheets, and emails, the emphasis is on getting what the users need rapidly. Diligence may be incomplete. The firm may not get the lowest price or generate sufficient options from which to choose or buy the first-best solution, but rapid early-stage revenue growth can make up for these deficits. At least they prioritize end-user needs.
A company enters the exploit phase when it switches focus to managing growth and fulfilling demand for the product they have built during the explore phase. It implements processes designed for rapid completion and execution of tasks rather than on the accretion of value. In procurement, the objectives (and the KPIs) shift to narrow in on compliance, consistency, and efficiency. However, there are very few later stage organizations that incorporate feedback loops to assess how well the end user’s needs have been addressed and to measure the return on investment.
Currently, the entire global economy is undergoing massive change. End user requirements are changing as are the options available. It is imperative today to retain the user-focus of the explore phase. Central to this is collaboration and communication between the various stakeholders of the procurement process. At the same time, efficient processes and thorough risk management are imperative given the intensity of global competition.
In the explore phase, firms should implement a process much earlier than they do in practice. In the exploit phase, procurement should not forget that their primary allegiance is to their internal customers who are responsible for generating real economic value.
Traditionally, the buyers of procurement technology and services have been later stage companies because of the explore-exploit dynamic, so incumbent solutions tend to be over-priced and over-featured. They are not designed for companies in the explore phase. Incumbent solutions do not promote collaboration at all. They are built to support established practices with little to no capability to incorporate the needs of end users and various stakeholders
That’s why we built EdgeworthBox. We have built an easy-to-use platform for procurement that enables firms to establish robust processes when they are in the explore phase and allows firms to retain the collaboration and user-focus when transitioning to the exploit phase. We would love to talk to you about your procurement challenges. Please reach out to us at chand.sooran@edgeworthbox.com or naresh.rao@edgeworthbox.com.
