Over the years, AIQ has found that there are three essential elements of procurement that result in the best outcomes for our clients. We call these the Three C’s: Clarity, Competition, and Control.
ClarityThe first of the C’s is Clarity, and it concerns prerequisites that lay important groundwork for the overall project. It is important for you to be clear in the following ways:
- Fully understand your current consumption. This means knowing all of the components of your various billings, from all service providers. It also helps to understand if there are any underlying trends apparent from your consumption over time.
- Fully understand how much you need to consume. A bit different from the prior point, it’s important to know the degree to which you might be over consuming services about your needs, or if there are near-term pressures to increase your consumption.
- Clearly describe current and optimal consumption to the service providers bidding on your service, so that they can optimally work to win your business, and provide pricing and solutions that best meet your needs.
Building clarity also helps in another way. The demand set of services that you put out to bid needs to look like something that you’re going to buy, and moreover that you are prepared to move on crisply. Clarity also helps avoid putting service providers in the position of building in “wiggle room” into their quotes to account for unknown costs they suspect that they might have to incur.
To obtain optimal pricing and services, once you have built clarity around the services you use and need, the next critical C is competition. Building a competitive landscape around your procurement project is vital to achieving best-in-class pricing and business terms.
Some factors influence the degree of competition that you can build. Some of the biggest are:
- Ensure that there are two or more compatible providers for each distinct part of your spend, and more is better. Internationally, this may vary by service and country. The same service that may have many potential service providers in North America, may only be available through a government-run monopoly in another country. In these situations the service spends in those countries will need to be addressed differently as head-to-head competition does not exist.
- You need to be serious about your willingness to move your business. Both incumbent and non-incumbent providers need to believe that there is something to win or lose from the procurement process, to motivate their best competitive offers. The easiest way to ensure that they understand this is to be prepared to change to the provider who brings the best offer.
- Timing is important when beginning a procurement project. It is important to time the effort to precede the expiration of your existing contract or the fulfillment of any volume commitments you may have on your existing contract.
- Finally, the volume of your business needs to support the procurement project. Depending on the types of services that you are competing and the size of the service providers you are asking to participate, the volume threshold for the best competition will vary. Generally speaking, smaller companies will be willing to compete aggressively for a smaller volume of business, while very large service providers may need to see an opportunity in the millions of dollars before they are willing to engage their own special pricing teams. That said, all sizes of providers may be willing to compete aggressively for smaller volumes if they perceive the type of service being competed is particularly easy to move from one service provider to another. The key is that while the thresholds may vary, they need to be a meaningful enough portion of their business so that the service providers are strongly motivated to win (or retain) your business.
Like any project, procurement projects need to be well-managed, and part of the effective management of the project involves controlling various aspects of the project.
With a large procurement project, communication is the first thing around which to set up controls. Large projects involve many details and many incumbent and non-incumbent service providers. Failing to set up good communications control will add unnecessary chaos to the procurement, and ultimately will reduce the quality of information available at the end with which to make the best decision. This means that all information relating to the procurement project should pass through a single point of contact, who then is responsible for communicating information to the team and the participating service providers, as appropriate.
Another facet of controlling communication is ensuring that the information about your consumption does not give the incumbent an unfair advantage. To help ensure that, it’s important during the procurement project that everyone within the organization, including executive, operational and procurement professionals, observe the lines of communication, even for otherwise routine communications. Material adds, moves, and changes, while necessary to maintain the services for the organization, should be echoed to the procurement project team and ultimately to the bidders. This helps ensure that the bids you receive are as relevant as possible, and also that you will be able to compare them intelligently to one another. It can be a real procurement nightmare to try to select among competing bidders when they are all bidding on somewhat different things.
An effective procurement can yield large dividends to your organization. For larger companies, you can produce tens of millions of dollars a year in savings. Even smaller companies can typically achieve anywhere from 30%-60% savings on their existing spend rate. These savings flow right to the bottom line of your company and can be used to expand the company or fund other investments that are key to the company’s strategic goals.
Because of the large impact, it is critical that the procurement project is well-managed, from start to finish. The three C’s discussed here are essential components to achieving a memorable success from the effort.