This article was originally published on Commitment Matters’s blog on February 28, 2017 by Tim Cummins, President & CEO IACCM.
As recently as the mid-1990s, 81% of business spend was on goods. By 2015, that number had dropped to 44%. The growth of services procurement has therefore been spectacular – and the capability of business to handle this change lags far behind.
The differences between acquiring tangible goods and intangible services is significant. For example, it is relatively more easy to define the requirements for a tangible product and to determine at the point of delivery or acceptance whether it is fit for purpose. In many cases, the source of supply is less important than the price and the need for a sustained relationship with the supplier is often of limited significance. However, for more critical products, or in situations where they are being packaged for inter-operability, buyers have learnt that it is smarter to hold suppliers to account for performance – and in this way, they have driven many former product contracts into being service-based contracts for performance or outcomes. Add to this the growth of outsourcing and professional services and it is easy to see why the transition to a services-oriented economy has occurred.
Services, however, are often much more difficult to define and the criteria for ‘success’ can be complicated and take time to measure. Essentially, we are no longer buying ‘things’, but rather we are buying ‘relationships’. And that doesn’t fit well with the adversarial, price-based negotiations of the past. Control, compliance and commoditization do not align with the need for commitment to long-term value delivery and the importance of agile, adaptable supply relationships. Therefore the three new ‘Cs’ of procurement must be cost of ownership, cooperation and collaboration – factors that demand new criteria for selection and for managing performance.
But the challenge (and the opportunity) goes deeper than simply reforming procurement skills or methods – and it applies to both buyers and sellers. For 20+ years, organizations focused on driving out cost through internal efficiency. They outsourced extensively (to cut fixed costs) and streamlined what remained through massive investments in technology. Today, with most businesses spending 60+% of their revenue on external supply, the room for internal cost cutting is limited. But the opportunity to drive similar efficiencies in external relationships is enormous. That’s because most organizations continue to interface with the outside world as if they were buying products, rather than acquiring relationships. The inefficiencies and tensions in most buyer-seller relationships create enormous value loss and erosion – according to IACCM research, an amount that is on average equivalent to 9% of revenue.
Essentially, in streamlining internal processes, businesses have generated inevitable conflicts when they try to work together. Without extensive human resources, they struggle to adapt and work together in any harmonious way. That is why the contracting process is rising to the fore as the next big area for business transformation. Disciplined contracting can deliver high-performing relationships – but right now, few organizations have that discipline and many continue trying to drive value through dysfunctional processes and adversarial risk transfer.
A recent webinar by Vodafone and SirionLabs was a refreshing example of new thinking and new capabilities. The supply management team at Vodafone have recognized the importance of building contracting and performance management capabilities and have redefined organizational roles and skills. At the same time, they have introduced the dynamic software provided by SirionLabs, designed to facilitate collaborative buyer-supplier relationships through shared governance and performance management data and techniques. In addition to the webinar, you can discover more about this ground-breaking partnership at the IACCM Europe conference in Dublin, May 8th – 10th.
As with so many fundamental shifts in business conditions, it takes time to recognize what is going wrong and how it can be fixed. But any impartial observer could quickly point to the chaotic and fragmented state of buyer-supplier relationships and recognize that there is room for massive improvement. We must indeed stop thinking about buying things and instead start to buy the relationships that we need for success – and of course, equip ourselves to manage them.