Procurement’s role in effective Contractor Management
Procurement is at best often not contributing effectively to smarter contractor management, and at worst is a major part of the problem.
Procurement frequently misses out on the opportunity to add a strategic perspective to the selection and management of contractors, while internal complexity and inertia hinder collective performance and that causes contractors’ energy, enthusiasm and insights to be left untapped as a source of innovation and improvement.
An overly transactional view of what procurement performance is measured and rewarded – focusing on year-on-year savings and negotiation results, ruling out the counting of so-called soft savings or cost avoidance and disincentivising long-term solutions for capital expenditure – stands in the way of a more responsible, business-aware interpretation of Procurement’s role.
By contrast, Procurement functions in the most successful companies support their business by adopting several success factors:
Key success factors
Take a strategic approach to contractor selection and management
Getting the “best deal” on a transactional piece of work will rarely be the smartest long-term move. Then award small projects and pieces of work accordingly, with regular adjustment of allocated work based on contractors’ performance (e.g. from a 40-30-30 split to 20-40-40). More significant projects, such as a major outage overhaul, can be tendered more systematically with the existing pool.
Examples of such practice can be found where the work requires intimate knowledge of the site and the client, and include the following:
- Multi-year focus in procurement – using frame agreements and contractor pools
- Contractor relationship & performance management – going beyond the numbers to understand their motivations, capabilities and how they function as an organisation. Maintain dialogue with the wider market and keep abreast of new trends, issues, risks, innovation, etc.
Tailored qualification and negotiation approach
All too often, negotiations are conducted purely to get maximum concessions. When conducted by “tough” negotiators who – sorry, Procurement! – may also be lacking an in-depth understanding of the scope and its complexity, squeezing the contractor might be all they can go on. While these concessions can appear – and sometimes are – valuable, they have a serious flipside.
A desperate contractor in financial or operational difficulties will be much more willing to give those concessions than a successful and sustainable contractor. That will inevitably lead to one or both of two things: either the contractor will not be able to perform, e.g. due to bankruptcy – and there have been several examples of this in the media recently, or they will not be willing to perform and will hit the client company with claims and arguments as to why the client is at fault for delays and additional cost, in some cases close to the point of extortion.
Too often, the qualification process focuses excessively on paperwork and ticking boxes – and not enough on gaining a true understanding of the contractors’ capabilities, and indeed on their compatibility with the client organization.
Taking a more nuanced approach to negotiations and contractor qualifications and engaging the people in these crucial processes with the best ability to read between the line and understand grey areas will inevitably lead to better insights and help stop the company taking unwise decisions that looked well on paper. The checklists and formal requirements are important – the message is that they cannot and should not fully replace the value of additional personal insights.
Take ownership for internal alignment and clarification
Internal levels of complexity, capability, commitment and inertia play a significant role in the quality of collective performance with a contractor. Put simply, if the organization does not live up to what its own deliverables and performance need to be, the interfaces to the contractor will suffer, with poor performance and a quagmire of claims and counter-claims often being the logical outcome. Delayed responses to contractors’ questions, late transfer of documents and drawings, unclear scope are simply a few of the seemingly trivial issues with a big impact on collective performance.
Typically, each complex topic area has its own experts and functional teams. The most successful organizations have a proactive procurement team taking ownership for bringing together all parties to form a coherent and comprehensive whole, to ensure internal deliverables are met and to give contractors a clear, credible and competent port of call for their issues.
It is invaluable to have somebody with an antenna for and proactively seeking out issues that, if unresolved, may come back to haunt the organization later on – and Procurement at the interface of the contractor and the customer is the prime candidate to fill such a role, including voicing issues and concerns flagged by the contractor and pushing for these to be resolved.
Procurement can fill the gap by setting up cross-functional standards for contracts to ensure clarity of mutual deliverables, expectations and scope, and by driving ongoing contractor management, performance reviews and management engagement throughout the course of contract execution.
Act as innovation and improvement driver
Contractors are often intricately involved with their customers’ operations, which allows them to gain closer insights than, say, suppliers of physical products. This puts them in a unique position to share outside-in insights to help the customer improve their operations. A joint Continuous Improvement (CI) Programme with major contractors and service providers can be a very effective tool to systematically collect these observations, prioritize actions and deliver improvements.
As a welcome side-effect, it also visibly demonstrates to the contractor that their issues are a priority to the company, which helps to maintain a constructive mindset and create a level of understanding or patience that not everything can be dealt with at once.
In the most successful organizations, Procurement stays abreast of opportunities to innovate, new developments and market trends, and can translate these into an agenda of meaningful solutions for the company, in line with a clear understanding of the company’s strategic direction and operational priorities.
Adopting a strategic approach to contractor management, taking ownership for the company’s performance in dealing with the contractor and acting as a force for improvement and innovation are the core tasks for Procurement in transforming contractor management into a source of operational excellence and competitive advantage.
For a Procurement function acting as a year-on-year price reduction outfit this is a big task, and it might appear close to insurmountable where the function has only been playing a largely operational or administrative role.
Leaders need to be aware that this is a complex and challenging journey, best supported with a cross-functional roadmap in full alignment with business needs. A top-level sponsor is essential, along with active involvement of all required functions and business units.
These steps will help build sufficient momentum. That is only the start: in parallel structures, roles and people need to be put in place to swiftly go past the point of no return and create sustainable and effective contractor management.