Is Problem-Solution Fit More Important than Cost in Procurement?

Companies buy goods and services to solve problems.

Problem-solution fit describes how completely a specific solution solves the problem, as it is defined. There can be many alternatives.

For example, in the context of the Covid crisis, governments around the world have wrestled with the problem, “How do I return my country to normalcy as quickly as possible?” Given the seriousness of the situation, all kinds of options have appeared:

· Mass vaccination

· Social distancing

· Masks

· Lockdowns

All of these options have their strengths and weaknesses, leading to tradeoffs that policymakers need to consider. Is a vaccine even feasible? Can we enforce social distancing? Can we get people to wear masks? Can we source enough masks? What are the temporary and permanent economic impacts of the lockdowns? What are the mental health implications of each option? What are the consequences for medical health broadly of each option? For example, will people hesitate to get a lump checked for cancer or to investigate a persistent hacking cough?

Who are the winners and losers in each case? What are the costs that they incur and how can we offset those socially so that we all get the best recovery?

There are no easy answers.

If we could wave a wand and magically conjure a vaccine with 100% efficacy that governments could distribute quickly, then we would have the complete problem-solution fit. People could resume their pre-Pandemic lives (to the fullest extent possible, anyway) once everyone got the vaccine.

The Pandemic is a special example. Nobody cares about the costs of the vaccine or of the lockdowns in a sense. There aren’t too many voices complaining about the cost of the vaccine or its distribution, at least not at first. If lockdowns are sufficient to get us back to work quickly, then the economic burden of paying people to stay at home for a fixed period of time is just something we will have to pay.

Note that we explored all the options. Given the disastrous severity of Covid and massive uncertainty about which alternative would work fastest and most completely, we had to investigate every possibility.

So, without cost being an issue, we optimized for product-solution fit. Absent any other factors, we picked the solution that appeared to solve the Pandemic most completely and most quickly, pivoting as new, better choices became available.

This is problem-solution fit.

But not everything is a fire drill.

In almost every other purchasing scenario, we are not in the kinds of dire straits in which our survival is in question. We buy goods and services subject to a budget constraint.

Our financial policy dictates how we finance our company and what kind of resources we have available to spend on procuring items. It is the job of the procurement group to ensure that we stretch those dollars for the maximum overall benefit of the firm.

We have what economists call a constrained optimization to solve.

We need to maximize problem-solution fit subject to a budget constraint across all goods and services that we procure for the enterprise.

Before comparing on cost, how do you quantify problem-solution fit? How do you say that server A has a better problem-solution fit than server B when you’re looking to kit out a data center, for example?

It is immensely difficult. Perhaps you can measure the different kind of throughput that different options might create for your assembly line, but that is a simplistic example. We often have to consider entirely qualitative factors (or, at least, aspects that are difficult to measure) such as ease of use and projected utilization, etc. Much of this comes down to assumptions, if an attempt at quantifying the problem-solution fit is made, at all.

Often, if not usually, it is easier to quantify cost than it is to quantify (meaningfully and correctly) the problem-solution fit.

Perversely, most procurement exercises, whether they realize it or not, reduce to minimizing cost subject to a constraint that problem-solution fit is “good enough.”

The other issue is one of cost allocation and the concept of opportunity costs. There is a total cost of ownership for the solution. But, in using the chosen option, the firm incurs production costs or operating costs. It could be that these would turn out to be lower with one of the options not chosen in which case the firm has incurred opportunity costs. Of course, these don’t show up in a way that could be used to hold anyone accountable. We just see the lower profit and loss than what we could have had.

This is compounded by the search costs in identifying the most relevant potential solutions and vetting them (and the attendant suppliers), as well as the transactions costs in executing a procurement cycle.

It is no wonder that RFPs, in particular, have become pro forma exercises in apparent compliance, twisting what is essentially a sole-source acquisition so that it looks (falsely) like a competitive solicitation of bids.

Problem-solution fit is at least as important as cost in procurement because of the real issues of lower productivity and higher costs that appear elsewhere in the income statement from picking the wrong solution. These are often not accounted for properly in the optimization problem.

Without thinking about problem-solution fit correctly, procurement risks optimizing for the wrong thing, the wrong way.

EdgeworthBox is a platform for buyers and suppliers that sits as a layer in the procurement technology stack to lower these search and transactions costs. We work with your existing system to help you get the most out of it, whether it’s legacy software, an ERP module, or the latest cloud-based source-to-pay system.

We make it easy to generate competition by accelerating the time to onboard new suppliers, so that buyers can solicit vendors with whom they have no pre-existing vendor-of-record relationship. We enable easy access to market research with databases of live and historic RFP activity in structured format. And we connect buyers and suppliers to one another for the collaborative sharing of intelligence about the markets in individual vertical categories. Check out this short video for a quick overview. Give us a shout.

https://bit.ly/35RftMu

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Chand Sooran

Chand Sooran

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Founder & CEO, EdgeworthBox. Investor and entrepreneur. I want to change the RFP business process.