Archive for June, 2008
An interesting insight came out of our interviews with Procurement professionals (Procurement Talks: An Interview with Microsoft and Expedia’s interview to be published next week).
There’s not one style of procurement, but many. From traditional to progressive (my term for high-tech). And infinite hybrids in between. Procurement’s style leads them to operate differently.
And that matters if you’re trying to sell contract services to them.
Procurement’s style seems to be driven by the type of business their company is in. So, let’s look at the two end styles (you’re on your own for everything in between).
TRADITIONAL STYLE PROCUREMENT
A traditional procurement style buys products and services primarily for in-house operations. This style held the informational reins on the purchase, from specifications to sourcing/vetting vendors to bid/negotiation, even through to vendor performance and compliance.
The traditional style buying was done by people who really knew a great deal about what they were buying. This is the world of deep analysis and cost-basis pricing. And the recipients of their buys (business owners) lived and died by procurement’s acumen.
Today, this style lives in manufacturing and industrial businesses - with big spend, complex buys, long lead times, and often limited number of suppliers.
What This Means to Vendors (Contractors)
Contractors would do well to recognize this style of procurement and explore the following:
OPEN KIMONO
Consider presenting full disclosure pricing. Even if the bid doesn’t call for it. Why? Because this is how traditional procurement works. They seek to understand vendors’ cost basis and then back into a vendor’s pricing to see if it’s reasonable.
QUANTIFIED VALUE PROPOSITIONS
In proposals, send only well-defined, quantified value propositions. Tie the value of service into measurable business outcomes, showing clearly where and how it impacts their businesses’ bottom line.
LONG-TERM RELATIONSHIPS
Invest in long-term relationships for developing credibility and personal connections. Churn in procurement in these businesses tends to be more stable, so you’re likely to work with the same individuals for years.
PROGRESSIVE STYLE PROCUREMENT
Again, the term “progressive” is mine. This style is seen in high-tech businesses, particularly software and online services.
The progressive style outsources non-core services as well as buying products for in-house consumption. But here, unlike the traditional style, procurement isn’t the deep knowledge base for what they’re buying.
Progressive procurement doesn’t have time to gain the expertise of all their buys. They’re focusing on their core business buys. For everything else they’re spread thin. Often they rely on their business owners to identify preferred vendors to include on bid lists.
What This Means to Vendors (Contractors)
By understanding the progressive style, contractors can more successfully engage procurement. Consider:
HOMEWORK UP FRONT
Do a great deal of homework up front to know what’s important to them. Don’t waste their time being unprepared.
HYPER-SUCCINCT
Send only hyper-succinct snapshots presenting the vendor’s value proposition. Cut all smoke and mirrors. Include similar clients as references they can contact, and include specific dollar savings or improvements your reference will allow.
DEVELOP CREDIBILITY
Develop credibility with business owners around vendor’s expertise. In both interviews, procurement said their business owners found vendors who were speaking at trade shows and seminars, or publishing articles and blogs. These weren’t self-serving vendor promotions, but education for their clients’ (business owners) industry.
QUANTIFIED VALUE PROPOSITIONS
In proposals, send only well-defined, quantified value propositions (same as the traditional style)
EDUCATE WITHOUT PREACHING
Don’t assume procurement understands the vendor’s business. Procurement wants to know more, so they can buy a better deal. It’s in the vendor’s interests to be the one that helps them do that. But avoid preaching that wraps a vendor pitch in with the goods.
What style of procurement to you deal with?
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Chris Arlen
President, Service Performance
Technorati: procurement, service contracts, value proposition
June 27th, 2008
Buyers want to succeed - sellers want the same. What’s in the way?
Understanding each other.
Sharing perspectives is a first step along the way to success. To that end I recently interviewed a Procurement Manager at Microsoft. And there’s another interview coming the end of this month with the Senior Director of Procurement at Expedia.
Having worked with contractors for many years, it was interesting to hear some of their commonly-held beliefs confirmed. However, a number of their beliefs were off the mark too.
From procurement’s side, both interviewees understood contractors pain in the process. But confirmed procurement’s role as helping their companies succeed - by buying the best value, at lowest cost.
Simple, Not Easy
These interviews provide great insight into the buyer’s mind from the procurement perspective. If contractors want to sell more, they’ll need to understand buyers very well.
Conversely, if buyers want more value from their spend, they’ll have to better understand what they’re buying. And how it helps their company succeed.
A few insights popped out during these interviews. Here are a few:
Procurement doesn’t buy low price only
Sellers (contractors) have heard this before but may believe it’s not true. Many believe buyers are lying to trick contractors out of profits.
I heard clearly in both interviews that price is rarely the only factor. And not always the most important. Despite contractors believing low price is the only consideration.
Procurement is more interested in how the purchase (contract service) can help their company. That was always the first consideration.
Contractors’ sour grapes may be more an indication of not knowing what’s important to procurement or the business owner.
Buyers want to understand what’s being purchased
This may seem obvious, but if sellers take it for granted they’ve missed the boat.
Procurement (and business owners who’ll manage the contracted service) don’t always know how their purchase will help their business succeed.
Or, they’re unable to articulate it. When that happens, buyers can only fall back on the lowest cost to their company as success defined.
Contractors can help buyers better understand the business impact of their services. Not more sales and marketing smoke self-congratulating the contractor.
Procurement does not manage vendors
Procurement does their bit up front. When the contract is finished it’s handed over to the business owner to manage the vendor. Procurement doesn’t have the expertise, or time, to oversee the service.
When the contract date comes up, procurement will follow it’s bid evaluation process, which may or may not include an RFP process or renegotiation. But it’s only the business owner’s feedback on whether the contractor delivered what was promised.
How well do you see the other side of buying and managing contract?
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Chris Arlen
President, Service Performance
Technorati: procurement, facility services, vendor management
June 17th, 2008
The expression, “can’t save your way to success”, can help service contractors better understand how they fit into their customers’ world.
I first heard this saying yesterday from a senior manager of corporate support services at a Fortune 100 company. She uses in-house employees and outsourced services to deliver support.
“Can’t save your way to success” says bluntly no matter how good or cost effective support is, if the revenue generating parts of a company fail, the company goes down the drain.
Note: I’m including all cost of goods sold in the revenue generating part. And for support services, I’m thinking facility services, i.e. janitorial, physical security, O&M (operations & maintenance), etc.
It made me think how contractors must deal with the reality that their customers are only expenses within their own companies.
Then it’s no surprise that support services impact a company’s profitability but not it’s viability. Logically companies look to provide support as cost-effectively (lowest cost) as possible.
Voila! Procurement has it’s marching orders. Highest value at the lowest cost, but mainly the latter. Why? Because purchase savings are easier to show than value. And service value can be hard to determine.
How can this help service contractors avoid procurement’s low-price hunting?
In two ways:
#1 Discovering how business success is defined
#2 Telling a compelling value story
#1 Discovering how business success is defined
Contractors must fully understand what success means to that particular company. Asking procurement or the business owner “What does success for you look like?” is key.
And success is never defined in monetary terms alone. There are other criteria, such as legal and regulatory compliance (just ask the former Enron CFO about that one).
Procurement is going to drill all contractors on cost savings and low pricing anyway. But what other areas help/hinder the company in increasing revenue and profits, compliance, or public image?
Contractors must understand this specifically per customer. Before making their pitch for partnership.
Otherwise they’ll sound like a used car salesperson spouting meaningless hyperbole at customers.
#2 Telling a compelling value story
This is non-fiction, not fairy tales. Contractors must articulate how they can meaningfully help a customer’s business succeed.
With a specific understanding of success, it comes down to the contractor’s ability to tell a compelling story.
Doing so is the difference between persuasively winning and doing an informational data dump.
How do your customers define success?
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Chris Arlen
President, Service Performance
Technorati: contract services, facility services, procurement
June 13th, 2008
You manage a budget. You rarely overspend, showing slight, but noticeable savings year after year. You’re a professional manager, say, a Business Owner of an outsourced service.
What if you could end the year with significant savings from budget (>10%) , would you?
Experienced managers typically don’t. And they have good reasons not to. In most organizations there’s a penalty for being too good at saving money.
Budget Remorse
You work hard and come in under budget. During budget season your manager and Finance say “Well, they obviously had too much money for what they needed. We’ll make their next year’s budget that lower amount”.
Save money one year, penalized with less spend the next.
As a result, you’re going to spend all you’ve got this year, so you’ll have the same amount next year. Public agencies (city, county, state and federal) have this down to a fine art.
It still takes skill to stay in budget, but the organization may not get the most value for their spend. And if its a very static, stable spend, the Business Owner can pretty much coast through the year. Again, thinking about some public agencies.
Sandbagging
Of course some Business Owners work to overstate their annual needs during budget season just to create a layer of fat.
Then during the year they generate enough savings to earn their personal bonuses and look good. But organizations miss out on the big wins of real cost savings, because they don’t reward them.
And their bosses, having done the same thing themselves, often catch the Business Owner’s sandbagging when budgets are created.
Not Cashing Out Savings
Savvy Business Owners work around budget remorse and sandbagging by getting more from their budgets. They’ll manage costs downwards and then take those savings from budget and invest them in improvement projects within that year.
One manager told me he looks at a 3-year improvement window and figures out how to get there. Then he takes his under-budget funds and invests them in projects towards that 3-year vision. He gives his organization more value for their budget, and he’s given himself an upwardly mobile career path.
The Variables
Inflation, cost of living, scope change, and industry economics are all variables that require massaging budget and spend to fit.
The above aren’t the only two budget/spend scenarios. As you know, life is about infinite variety. But it’s interesting to think that a management goal, saving costs, should have a built in constraint.
How do you get and give the most for your managed spend?
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Chris Arlen
President, Service Performance
Technorati: budget, budgeting, cost savings, spend management
June 3rd, 2008
