28 January 2015by Jonathan Webb
How Do We Break Out Of Day-To-Day Procurement?.
Contract managementCost and Cash Managemente-auctionsprocurement technologySupplier relationship management
In this guest post, Procurement Leaders invites CoreTrust’s James Hallock to look at how (and why) procurement teams can keep a focus on generating value, however much of their day is spent managing RFPs and negotiating contracts.
Ask procurement professionals about their day-to-day responsibilities and they’ll undoubtedly name RFPs and contract negotiation. These are probably also the first two items on many of their job descriptions. Entire workdays are guided by upcoming contract renewal dates, with favoritism often given to suppliers offering an easy win.
So what’s wrong with this mindset? Plenty.
The foundational duty of procurement teams is not to solicit bids and sign agreements but to deliver value to the company that hired them. Running an RFP can, at best, result in good pricing and terms. It does not ensure that anyone with buying privileges, even those within a single business unit, will take advantage of that terrific deal. And it certainly doesn’t guarantee that the supplier will stick to its promises, or that the contract itself will age well.
CPOs could be delivering enormous value to their companies simply by starting with the end in mind. This will require a change in focus to:
- Spend categories most impacting the bottom line. Most companies are missing out on huge savings opportunities in areas such as HR benefits and travel due to contractual complexities or fear of change. But consider the reward: negotiating for 7% savings on $10m in pharmacy benefits management spend equates to $700,000 in savings. By comparison, brokering a 20% discount in a $100,000 spend category like payroll services would reap only about $20,000.
- Supplier relationship management (SRM). Without it, negotiated savings might never be realized. The better the relationship, the better a supplier knows your business and can be sure you get the right products and services. SRM is also necessary to ensure pricing accuracy, troubleshoot issues, and to help drive supplier programs across offices and divisions. If you’re not tracking supplier behavior, you also won’t know if service level agreements (e.g., three-day shipping) are being honored, which can have further negative consequences (e.g., late product delivery that adversely affects productivity). Research by PricewaterhouseCoopers found a positive correlation between SRM and increased market share and ROI, not to mention faster order fulfillment.
- Contract optimization. There are many ways to maximize the value of a contract by customizing it to meet a company’s needs, provided the agreement was negotiated that way. Car rental companies, for instance, might offer more favorable pricing in cities where employees travel most oftenâ€•and the flexibility for ongoing customization as those travel patterns shift. One of the portfolio companies of Welsh, Carson, Anderson & Stowe used this practice to lower its average daily car rental rate by more than 10 percent to a price well below the $40 daily rate most companies are content to pay.
- Compliance and standardization. Someone must champion utilization of negotiated contracts and that won’t happen until the CPO breaks down the barriers between business units and provides procurement leadership. The full savings potential of contracts cannot be realized until everyone making purchasing decisions at the company has standardized to those suppliers. Even in small categories like office supplies, the value of full compliance is a significant sum best not left on the table.
Of these, standardization may be the most difficult to achieve. But it can also be the most rewarding—standardization achieves both pricing leverage and it ensures that value is realized.
James Hallock is vice president of development for CoreTrust, an 850-member GPO for large corporations and private equity firms that provides access to a contract portfolio spanning multiple categories of indirect spend.