The procurement process is broken
How a running joke can become your most strategic department
Alan Shepard has a long list of out-of-this-world accomplishments to his name. In 1961, he became the first American to travel to space as pilot of Freedom 7, which was the first crewed flight of the Project Mercury missions. During the Apollo missions a decade later, he joined a super-exclusive club even for an already exclusive club of astronauts: He became one of only 12 people who have walked on the surface of the Moon and the only one to have played golf there.
While space travel (hopefully) doesn’t typically inspire thoughts around procurement, Rear Admiral Shepard’s perhaps unintended contribution to this field of thought is immense. Upon returning from his first flight into space, he articulated the following experience:
“It is a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract.”
If you’ve ever had to upload an RFP submission into SAP Ariba software, the very thought of procurement departments probably causes an instant wave of dread to wash over you. Procurement departments source, evaluate, and negotiate external goods and services. Knowledge work procurement tends to follow the principles of physical world procurement, but buying a critical new piece of marketing analytics software shouldn't follow the same process as your town running a tender for the purchase of garbage cans. One of these things is not like the other.
Historically speaking, procurement used to be much simpler. If you were buying software for your company, you sat in the CTO’s organization and your main use case for the procurement department was to coordinate different bids and help navigate the negotiation and contracting process. Similarly, if you were in the marketing organization, different outside service providers would compete for your attention, and the procurement department would then help you corral and negotiate terms and a price that your CFO could sign off on. We can go through other functions and roles, but you get the idea: Fewer customers to commission external tools and services led to an easier way of evaluating and keeping track of who’s in charge of what.
Today, the charted mar-tech ecosystem alone tops 8,000 companies, and buyers of technology and services can occupy just about any role in an organization. This in turn creates interesting organizational challenges. In many of our engagements, we’re often asked to conduct a current-state audit that starts by cataloguing all of the current tools and services used by various internal teams, their core owners, the contract terms, and who uses them day to day. It’s fairly common to find tools that were commissioned by someone who’s no longer with the company but keep getting renewed, because no one is quite sure how they’re used, or they’re being pulled into that one important report (never mind that that particular information could be sourced from a different system). On more than one occasion, we’ve found products made by companies that practically no longer exist. (Is zombie product a term?)
When almost everyone in an organization (or really anyone with a budget) can buy software and services, how should organizations approach buying? We’d like to introduce two concepts here. First, knowledge work procurement deserves to have a different approach to the discipline than physical world procurement. Second, procurement departments can absolutely play that role of strategic buying facilitator, but they need to transform.
Wait a minute, procurement is really a sourcing process. You define what you need, send out the bat signal (formal RFP), score the submissions, create a short list, make your decision, and proceed with contracting and deployment. Yet in knowledge work, there are considerably more intangibles. Frequently, collecting and documenting needs is a significant challenge; internal teams often have trouble articulating the value of certain requested features and lack a larger market context. It’s also not particularly glamorous work: RFP construction is frequently pawned off to junior team members, and there’s a tendency to reflect a very vendor-specific perspective. (We’ve seen RFPs where the questions were essentially lifted from the marketing materials of a participating vendor – so much for transparent purchasing processes.)
The traditional approach to procurement is to hyper-optimize for cost – as Alan Shepard helpfully pointed out. In knowledge work, intangibles tend to be greater and less predictable than when procuring physical goods. Lower sticker price doesn’t necessarily mean total lower cost; perhaps a cheaper software contract means you now need to hire more staff to use it effectively, rather than spending slightly more for bundled services, thus reducing your total cost of ownership. Perhaps the most obvious gap is that procurement departments are rarely the end users of the software and services they help procure. They won’t be the ones logging into that analytics tool every day or working with the consultancy that will help you execute your shift to in-house advertising.
OK, enough critique. How about some fixes? Three things come to mind:
1) Instead of a centralized approach, try an embedded team
Procurement departments today are largely process-oriented. Instead of a functional department, how about embedding procurement specialists within other functional teams? For example, the marketing team could create a role for a procurement specialist with expertise in evaluating, sourcing, and negotiating with marketing companies. The tools and services used by the average marketing department easily number in the double digits, which would warrant specialization on the procurement process side too. We already see this approach paying dividends in other functional areas. For example, technology teams have embraced retaining cloud computing billing analysts who can help optimize and reduce monthly infrastructure SaaS bills by performing regular audits.
2) From one-offs to orchestration
Your organization is buying a lot of different things each year, yet rarely do the procurement processes for individual tools and services overlap or directionally intersect. In complex organizations, it’s frequently possible to have different divisions run parallel processes for purchases of the same type of software, completely unaware of each other. In a recent example, a business intelligence vendor realized it was responding to two separate RFPs for the same client with approximately 80% of the two teams’ needs overlapping. The client was not aware of this until the short-list stage. This seems like an opportunity for procurement departments to act more strategically: Assuming they have access to all current and planned purchases, they could guide the two internal teams to a joint RFP or identify opportunities to re-use tools and partners that are already under contract.
3) Change how you approach RFPs
Internal teams frequently don’t have the time or bandwidth to really approach an RFP process strategically and consider different time horizons for selecting, implementing, and using software or services. Combine that with an inside-facing view that may consider company needs but largely omits major market shifts, and you have a recipe for no one’s favorite process. This can be alleviated by working with external expert resources who can drive the whole requirements-gathering process, rank possible vendors and partners, and provide that needed outside-in market perspective. External consultants are particularly valuable in articulating dimensions to base selection on, other than price, thus avoiding the dreaded race-to-the-bottom pricing trap that’s so prevalent in some industries (agency pitches, I’m looking at you).
The tools of knowledge work, whether software or services, deserve a better process for buying, operationalizing, and measuring value. The first necessary step to getting there often rests in procurement departments that have an opportunity to transform from passive, siloed functional units into the proverbial air traffic control centers of each company.
Given the more strategic direction for procurement departments we’re proposing, how does that change the hiring profile for procurement teams? Can career ladders be adjusted to account for tours of duty in procurement en route to operations perhaps? Lots of possibilities, but few defined paths today.
Is the ad industry dangerously reliant on pitches? (another must-listen from The Overthinkers crew)
Thanks for reading,
Ana, Maja, and the Sparrow team
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.