Are you buying what you want...or what you need?
Jonathan Cooper-Bagnall and Guy Strafford
Oct 27, 2014 3:19:00 PM
“The fish rots from the head”. Strong words from a recent FT article rounding up a series of accounting issues besetting large companies in the UK. Following a discussion between Proxima and respected commentator Stefan Stern; Stern argues that boards need to open their eyes to all activities in their business (from top to bottom) – but without getting involved in day-to-day tinkering.
And, he adds, they should take “the admittedly unglamorous business of procurement more seriously.” That might seem odd in a piece on accounting. But good (that is to say, strategic) procurement is valuable in every area.
“At every turn and in every supplier contract there is the potential for risk,” Stern continues. Last year’s horsemeat scandal was a very obvious public supply chain failure. But the notion of “supplier” isn’t limited to firms delivering to the “goods in” entrance.
We’re seeing many related failures cropping up in what was traditionally thought of as non-core areas – such as the provision of statutory audit. And this problem is not isolated to the UK. The Wall Street Journal reports that in the US, auditors “failed to follow proper procedures in more than four in every 10 audits”. There are all sorts of reasons for that – but for the companies and shareholders being audited, that’s a failure of a supplier.
Part of the problem is that complex professional services like audit are often procured poorly. Audit is traditionally managed by the Chair of the audit committee and the Group CFO. So why aren’t procurement professionals routinely involved in this high profile area of business spend?
A conversation during a recent IACCM ‘Ask the Expert’ panel discussion touched on the point that over time, procurement has made an industry out of complexity, creating processes rather than genuine strategic thinking. Business leaders have become perplexed by the rigidity and sheer number of all these processes. Then in complex areas like audit, legal services or corporate finance advice, they (often rightly) prize their own knowledge of the requirements and the personal relationships with the supplier above “paperwork”.A paradox, then: businesses want agility, accessibility and the power to apply expert bias – but still want the quality assurance to ensure risks are mitigated and that there is a paper trail. What to do?
The answer is to meld the two: inject expertise and strategy into tightly drawn, intelligent procurement.
The reason is that the process is still valuable. At a recent forum of private equity backed CEOs, the head of a tech company explained that their prime interest now wasn't the art of meeting a customer's individual desire. That's expensive and actually hard to replicate. The real mission was find a process that meets customer needs and/or solves their problems (whether they knew they wanted those solutions or not). In short, he said, they want to sell BPO - being the guys you turn to, to make your life better and more efficient.
That makes the procurement process all the more interesting. If you're simply describing the things you think you want (specs, a price, an SLA), you're almost certainly missing out, not only on the more strategic and value-adding package a supplier might be able to offer - but also on their desire to work with companies where they can apply an efficient process.
Boards might say they want a clean audit opinion to show banks, regulators and investors. (Actually, they probably say they need it, but grudgingly.) But their problem is more complex and strategic than that. The proof? Tesco is a great example. Instead of looking at their problems - complex balance sheet structures; supplier payments that attract criticism - they seem to have focused on an end product: a signed-off set of accounts.
Even when PwC flagged up questions around certain treatments, there was clearly a limit to joined-up thinking between the audit committee, the internal audit teams, finance and the commercial decision-makers. (Note that finance has now been identified as the source of the whistle-blowing. Finance sees everything eventually...)But the same principle holds in other areas, too. Procurement cannot simply be about choosing what you need to buy and picking threshold levels for a couple of criteria in an SLA. It can deliver entirely new approaches for the business but it requires you to ask yourself:
What business problems am I trying to solve? How am I delivering on strategy? And how can I enable our suppliers to best wrap around our changing needs?
If you have any thoughts or comments, please add them below.