Arguably the most infamous gaming of the system in World Cup history, as Diego Maradona of Argentina scores with his hand (and gets away with it) during a 1986 quarterfinal game against England. Maradona coined it “the Hand of God“. Also, my first footballing heartbreak.
Putting on my procurement hat, this situation immediately brought to mind the way our value is measured, how we calculate cost savings, particularly during the initial sourcing process, and how open the process is to being gamed.
If we are to be effective as catalysts, we must recognize that we have a choice: accept the current state of affairs or play at a higher level.
Here is a straightforward description of the game:
Step 1: Baseline the initial price/cost
Step 2: Agree on a final price with the supplier
Step 3: Calculate the savings by subtracting the final price from the baseline.
Simple stuff, but how much rigour really goes into baselining? How are we choosing to play the game?
I talk to a number of procurement professionals who explain that there is little to no consistency or governance in establishing a baseline. Moreover, I’m sure we all recall times where suppliers have been encouraged not to be too aggressive in their first-round pricing, or on the flip side, overly aggressive when making cost increase requests.
These circumstances open the door to gaming the system, particularly by incenting the development of unrealistic baseline models.
Leaving a Mark
Given this, how credible are the cost savings we are claiming and what is the long-term impact on our brand when a lack of credibility exists?
All the conversations I have had with CFO’s and other finance professionals clearly identifies lack of credibility as the number one factor in them questioning the value procurement creates.
What can we do?
My travels have exposed me to many organizations that do not count non-cash (or “soft savings”) as part of their savings target or reporting. Others invest in a process to capture realized savings by capturing actual spend from line level invoice data. While these methods can increase the credibility of our numbers, it still only addresses half of the equation (i.e., spend at the new price, rather than baseline).
A simple, and effective way to bring credibility to our cost savings baselines, indeed, to our whole function, is to follow a structured stage-gate governance process that builds consensus and ownership among all parties, stakeholders, finance, and procurement.
First, establish the ground rules for any and each sourcing project or price negotiation. A good place to start is to define the methodology for calculating the savings. Present this to both stakeholder and Finance, engaging with them from the outset to drive a way to measure success that all contribute to and take ownership of.
Second, involve our stakeholder in the sourcing and negotiation process (consider inviting the participation of Finance and, even, Sales, for the larger or more strategically important projects). Essentially, we want to be transparent and engender the trust of our colleagues, among other things, in the process as a whole and in the inputs to the agreed upon algorithm measuring progress (AKA “success”). This approach also allows us to leverage talent and wisdom from across the firm to produce results that are both in sync with current requirements and the longer term vision of the company.
Finally, responsibly use the agreed upon formula(s) to measure progress on a regular basis. This way, appropriate and timely adjustments to the process can be made along the way and the expected outcomes produced.
Procurement consultant Ron Larimer provides an accessible overview of baselining in this piece: How to Create a Strategic Sourcing Baseline (and Explain it to Finance).
If you are struggling to gain credibility in your savings numbers, or you are finding that your current process can be easily gamed, this approach is a great place to start.
The credibility gap is one of our greatest professional challenges as a community. Owning this reality is critical to elevating our impact (or even having the opportunity to make one). As a first step, we need our process to be inclusive, transparent and consistently applied. This will generate ever-increasing confidence in our baseline numbers and how we can contribute to individual stakeholders and the organization as a whole. I think this buys us the credibility and permission to responsibly elevate the conversation to be about generating value beyond savings.
Some questions to ponder:
- Am I running a marathon or a sprint?
- How do I measure the value I bring to a project?
- Is my measurement related to process or to results?
- Do my stakeholders know how I am calculating value? Do they accept/agree with my method?
- Do I want to be a hero for a day or a franchise player?
Being a Catalyst
As always, if you come across an article, whitepaper, video or podcast that you would like to share with your fellow catalysts, please send a quick email with the details. I read every email and am eager to read yours.
This Week in Procurement
This Week @ AOP
The quality and accessibility of master data is a critical but often overlooked pillar of all successful procurement teams. Complex and difficult to master, it’s often left to the side while we pursue “easier” transformation and improvement initiatives.
Technology is now opening up a new world of possibilities for converting seemingly disparate data into useable intelligence by taking new approaches – leading to more effective sourcing and category strategies.
I’m joined on the show this week to discuss the mastery of your master data by Doug Paul, a GM of Sourcing at General Electric’s Global Operations Group. Doug has responsibility for developing, improving & standardizing shared sourcing processes, operations & tools across all of General Electric.
I’ve got to know Doug well over the past 12 months – as you will hear in the interview, he is passionate about the role of procurement, but also the need to continually improve, challenge our assumptions, and to take control of our own destiny.
Towards the end of our discussion, we also try out a new feature – the quickfire round. I’d love to know if you think this should become a regular feature!
You can listen in to our conversation here.
Until next time,
(Come on England!)