Why Do We Have a Procurement Department?
It’s an interesting question that we don’t ask often enough: why do organizations have a procurement department?
Speaking with a supplier recently, he told me that his company refuses to participate in RFPs. This isn’t because he is afraid of competing. He has a compelling solution that creates real value for his clients, priced fairly. He solves a genuine problem.
He told me that, in his experience, the RFP is a bureaucratic fools’ errand. Too many times, he had been invited to submit a proposal in a process that was pre-determined in favor of someone else. He spent thousands of dollars developing a customized proposal, in effect giving the customer free consulting advice. The buyer got to say that they ran an auction when, in fact, they had purchased his competitor on an effectively sole-source basis.
He is not the only person to say this.
What’s more many small and medium-sized enterprises don’t have the sophistication or the tools to run a good reverse auction. Instead, they end up sole-sourcing the acquisition, as well. Big Procurement systems are cumbersome, expensive, and over-built.
Another variation on this theme is the phenomenon of the “shaped” RFP. We’ve written about why these fail here.
A shaped RFP is one in which the salesperson from an individual supplier has managed to influence disproportionately the writing of the buyer’s RFP in a manner that biases the decision in favor of the interventionist supplier.
Let’s not forget that the bureaucracy of a poorly executed RFP cycle means that it takes an unusually long time to navigate. Another term for RFP cycle is “sales cycle.” Long sales cycles alienate suppliers.
Put this all together and this quote sums it up:
“It seems that marketplace suppliers are RFP-weary, and factoring in the costs for responding and submitting an RFP, RFI or RFQ to win new business or renew existing business has taken its toll. The bottom line is this: If suppliers feel they have a fair shot at winning your business, they will invest the time and resource costs to participate in your RFP process. Conversely, if they review the RFP and the group history (if any) and ultimately determine that the request is just a pro forma action, as the customer likely will renew with their existing supplier, they will not bother to respond or participate.”
It’s not just RFPs. The procurement department should be seeking competitive quotes for purchases that fall below the RFP threshold. But this is often the province of the catalog in which a buyer’s staff can purchase goods and services at static, pre-negotiated discounts to a supplier’s list prices. Of course, these discounts are arbitrary and rely upon volume thresholds.
There is a natural entropy to purchasing, as well. End users want to control what they buy. They want decision independence, even as they are willing to comply with a procedural mandate. This is especially true in IT or other specialized types of acquisition.
So, why do we have a procurement department?
Companies have a formal approach to procurement to prevent “waste, fraud, and abuse.” At some point, enterprise spend becomes large enough to justify the expense of having a department dedicated to reducing these kinds of frictions.
On the face of it, one might think that this means putting into place policies for individuals in business units to execute. As long as they are compliant with an approach that has been proven to generate competition than the procurement should have done their job. One might also think that the procurement department would spend the majority of their time assessing and evaluating vendor performance to ensure that the suppliers with which the enterprise contracts for goods and services are delivering on their obligations. Or it could be that the procurement department has a forensic role in investigating fraudulent activity, cases in which the prophylactic benefit of the purchasing policy proved inadequate.
Finally, if the Pandemic has taught us anything, it is that the procurement role is a risk management one. Here’s Deloitte quoted in our blog post:
“It turns out that agility is indeed a sort of antidote that helps inoculate firms against complexity and risk so that they deliver healthy performance results even in the toughest of times.”
Using email and spreadsheets can compound the problem, as we wrote about here.
Procurement, instead of mitigating risk, too often can increase risk by discouraging active vendor engagement, substantive RFPs that encourage supplier response, and efficient research cycles.
Putting it all together, the ideal solution would recognize the natural entropy of purchasing, decentralize and enable procurement procedures, permit auditing for compliance and abuse, and do so in a way that engages and encourages the right suppliers to make proposals.
This is what we have built with EdgeworthBox. We call it elastic procurement™. Buyers and suppliers get access to tools, data, and community, with an unlimited number of seats for free. We charge when there’s a procurement event or for additional value-added tools.
This overcomes the IT problem because our variable cost solution is much less expensive than costly, fixed cost Big Procurement systems. We make collaboration between departments possible. We can accommodate the natural entropy of acquisition. We free up procurement to focus on minimizing “waste, fraud, and abuse.”