Making a real impact in Indirect Procurement
King, Queen, Knight or Pawn – are you making the right strategic moves in Indirect Procurement?
Seamless interaction between multiple departments and locations, consistent processes, transparent data – and fully supportive and engaging stakeholders, willing to give up long-held comforts to help Procurement improve the bottom line. For many in indirect procurement, this vision remains a utopian pie in the sky – but it doesn’t have to be that way.
In a nutshell:
- Step outside the traditional, cut-cost-at-all-cost corner
- Understand the potential positive impact created by what you are buying and the risks of failure
- Evaluate risk and positive impact, map your categories as Kings, Queens, Knights and Pawns into the Strategic Indirect Procurement Matrix
- Realign your measurement system to reflect the priorities that matter to your business
- Prioritize for execution, build the roadmap and keep your stakeholders engaged
There are possibly as many definitions of indirect procurement as there are companies, for now let’s agree it comprises everything an organization needs from outside sources but that does not end up in the final product.
Let’s focus on why it can be so difficult to get those business stakeholders on board, when all Procurement is trying to do is “add value”. The hard truth of it is that it’s not all the stakeholders’ fault. Too often, procurement teams are looking at this through the traditional lens of their function. They are focused primarily on driving cost down, based on an assumption that their counterparts in other areas of the business are quite comfortable wasting the company’s money and Procurement is there to put that right.
It’s no surprise that this doesn’t exactly convince business stakeholders to welcome Procurement to the table when they are considering their options, possibly only bringing them in when an order needs to be raised for an invoice to be paid. Which in turn leads to frustration in Procurement – a cycle of negativity and conflict begins, bringing on a dysfunctional situation where in particular indirect procurement ends up in the “too difficult” box.
First, Procurement needs to be willing to step outside the traditional cut-cost-at-all-cost corner and adopt what we call “the CEO perspective”, by taking into account how the company as a whole needs to both prosper and manage risks. This involves a desire to really understand stakeholders’ strategic priorities and then to differentiate between situations and categories with high and low risk, and with high and low potential to support business growth.
Our Strategic Indirect Procurement Matrix helps you do exactly that: add the right kind of value for your business, focusing on cost where it makes sense and giving you a vehicle to get your business stakeholders on board.
There are five steps to the approach:
Step 1 – Define what ‘Risk’ means within your business
Otherwise similar situations may have very different consequences, depending on the business environment. For example, people businesses may be much more dependent on staff morale than a highly automated production facility, while public perception, hygiene or security will also have different levels of criticality. The first step is about understanding, from the perspective of the CEO and your key business stakeholders, what you don’t want to happen because such fundamental issues would completely outweigh any cost saving. And what we don’t want is to create unnecessary collateral damage when driving down cost. You should have around 8 to 10 key questions to assess the possible risk or collateral damage associated with a category.
Examples of such questions could be “Would failure in this area have a negative impact on the company’s ability to recruit key people?” or “Would supplier failure or unethical activity in this category have a negative impact on our ability to operate, e.g. causing the authorities to close our site?”.
Step 2 – Define the ‘Positive Impact’ that will help the business achieve its strategic goals
Is your business looking to expand into new territories, products or even industries? Are you in the middle of a transformation programme? Do you need solutions, people and resources available yesterday because otherwise you would miss the opportunity? Missing out could be far more critical than any potential benefit of squeezing suppliers for more savings, while you also need a cool head to avoid rushing into something you could regret later.
As with risk, select a handful of questions to reflect what is important in your business. Examples here could be “Will this have a strategically relevant impact on employee capability and motivation?” or “Is this essential to allow the company to sell and deliver new products, to new customers or into new markets?”.
For both risk and positive impact, Procurement should prepare a first draft then validate these with active input from key stakeholders. That will show your stakeholders that you are actively stepping into their shoes and are genuine about taking their insights and needs on board.
Give each question a score between 1 and 5, depending on its relative importance and criticality. Then score each category or item against each question. Categories with high scores in critical questions will naturally show higher scores than others. Again, do reach out to your stakeholders to get them involved in the scoring – you may uncover additional insights and it will help them to buy into the outcome.
Using our Strategic Indirect Procurement Matrix, plot the categories along the horizontal axis for risk and along the vertical axis for positive impact. That puts each category in one of four boxes:
Step 3 – Evaluate each category’s Risk and Positive Impact and map them on the matrix
We use the analogy of chess pieces to label the four boxes, as your strategic options are very similar to what you would do with each of these pieces.
Low risk, low potential for positive strategic impact? The “Pawns” are where you can focus on good, old cost-cutting by eliminating, automating, streamlining or outsourcing. In chess, you have eight pawns so you can afford to sacrifice a few.
Categories with significant risk but with low additional positive impact on your business are the “Kings”. In chess, the king cannot only move one small step at a time and will never win you the game – but if you can’t keep your king out of the line of fire, you will lose. This could be anything from cleaning services in a hotel through IT security services to your financial auditor: you might not win new business just because it works well but you sure can go out of business if doesn’t. Your core strategic task in managing your King categories is to ensure you are fully aware of possible risks and are managing them effectively. Beyond that, you can revise the specification to rule out elements of service that cost you money but are not required to avoid the risk.
The “Knights” are the most unconventional piece in chess – they can leap over others to get to where they need to be. This is where Procurement can also be unconventional, such as by deploying team members to support a new area of the business, applying less stringent procedures, worrying less about “setting a precedent” and more about making the new business successful. Category examples could be a leadership development programme, access to a market database or creating a customer app. At the same time, Procurement’s role here includes being the accepted voice of reason – showing they are committed to business goals and can do what it takes to achieve them, while identifying, voicing and mitigating any long-term dependencies or risks that may emerge later.
Finally, the “Queens” – in chess greatly powerful but a tough blow if captured by your opponent – are where both risk and potential positive impact are highest. Procurement is there to act as a strategic partner to key stakeholders and the board, supporting strategic goals while reducing cost where it doesn’t impact service and remaining an independent trusted advisor. Examples here could be delivery services in a time-critical business or marketing in a consumer-centric business.
Step 4 – Align the measurement system
What we haven’t mentioned yet is that Procurement is often only measured by savings achieved. This is partly what drives behaviours to only focus on cost-cutting, i.e. the Pawns, missing the bigger picture. Procurement goals need to be aligned with business stakeholders for the Queens, while cost-cutting for Pawns should be part of business stakeholders’ targets. Alignment is the key to ensure everyone is pulling in the same direction.
Step 5 – Prioritize the actions and prepare to implement
The insights, clarity and stakeholder engagement you will have gained through this process is likely to show you that there is a lot to be done. Build this into a structured and systematic implementation roadmap, with a stakeholder steering group to ensure close interaction and guidance along the entire journey. Your roadmap should not be purely category-based, as there will be several capabilities to be developed across multiple categories – and it will be your job to join these dots.
Do get in touch if you have any questions on how this could work for you.