Imagine if a Marketing Manager in your company said this to the Director of IT.
“You know Tom, I think it’s about time we switched from Frame Relay to an MPLS network.”
Then imagine that the Director of IT had no choice but to do what Marketing said.
That scenario would never happen of course, and there is a reason why it would never happen. It’s because Marketing is responsible for making marketing decisions and IT is responsible for making decisions about IT. That Marketing Manager and IT Director spent a good part of their career learning their trades, and they were hired because of their knowledge in those specific areas.
Still, every day we continue to allow people with no background in purchasing or strategic sourcing make decisions about which vendors their company should utilize, and what a fair price is to pay for those goods and services.
So, why do we do this? I believe it has a lot to do with traditional organizational structure. Purchasing departments were originally created as a tactical shared service. The company needed “stuff” and someone had to buy it. Departments would hand a requirement to purchasing and say “Here is what I need, purchase this for me.”
In the last few years many companies have created another layer to their organization called Sourcing. The sourcing department is normally considered more strategic than purchasing, designed to offset risk and reduce costs. They are asked to work across all departments and all locations to ensure the best overall value is received from the supply base. Yet rarely will you hear anyone in the organization go to the sourcing team pro-actively and say to them, “Here is what I need, find a source for this for me.”
In every organization I currently work with, the sourcing group’s ability to make decisions on vendor selection is limited, if not completely non-existent. End users – the one’s defining the requirement – still get to say who they want to utilize, even when that decision has no business case behind it.
Here are two recent examples I’ve come across in my work.
The first is a company that spent roughly $2 million a year on janitorial services across multiple locations. The sourcing group spent a great deal of upfront work defining the scope of work and ensuring the facilities team agreed with the RFP. They brought in all vendors for facilities tours and made sure the stakeholders walked through each building with them, describing exactly what service levels were required. At the end of negotiations, the two primary incumbent vendors came back with proposals that equated to about $100K in savings each. An alternate with a stronger national footprint, meticulous references and well-established service team provided a proposal that exceeded $500Kin savings.
Based on the facts, you would assume the company would move ahead with the new vendor. But the facilities group had concerns with the switch. What were their concerns? They had no prior experience with the new vendor. And that was it! When challenged on the decision, they also cited a faulty RFP process that failed to properly explain the required service levels – even though they helped build the RFP’s and had the opportunity to explain service levels directly to the vendors.
So what did sourcing have to do in order to get the organization to make the right decision? In this example, they had to build up internal sponsorship in order to get a decision from the top. They stated their case for 3 months, before finally the head of facilities agreed to proceed with a new vendor. Over that 3 month period, the company overspent by $125K, and no one (besides sourcing) seemed to mind.
In another example, a sourcing group worked hand in hand with IT to develop a scope of work for hiring an MSP that would assist them in deploying new software that was critical to the company. When the bids were in and lined up, two incumbent vendors had the best overall proposals. Evaluating the proposals side by side without looking at the name of the vendors, it was clear that Supplier B would be the selected vendor. They had more experience in this type of deployment, their team was more qualified, and their price was $200K less.
But the names of the vendors were not hidden, and the IT group decided to go with Supplier A, because that was their “preferred” vendor. In other words, IT liked working with them better. Sourcing had no ability to change their mind, but did manage to negotiate with the preferred vendor to get a more competitive price. In the end, the feedback from the IT team was “Sourcing appeared a little too price-focused during this engagement.”
In both of these cases, Sourcing was effective at engaging stakeholders and utilizing either change management (in the first example) or negotiation prowess (in the second example) to obtain savings for the organization. But in both cases it required a huge amount of extra time for the sourcing team, which meant it took longer to implement the savings. It also meant that sourcing had to focus on dealing with internal struggles instead of going out and starting a new engagement – which is an opportunity cost that is difficult to quantify.
The other commonality in both cases was that the stakeholders group challenged the sourcing team and the results at the end of the engagement, even though they were brought in as part of the team from day 1. Not only were they allowed to make bad decisions, but they also attacked the team that tried to get the organization to the right decision, which will likely lead to future problems with the two groups working together.
The reality is, until we stop allowing our IT or Facilities departments (or Marketing, HR, Finance, Admin) to make decisions about the source of supply, there will be untold dollars left on the table. Those departments weren’t trained to go to market, and they rarely have a strong business case for why a particular vendor is used. The reason companies pay more than you should is because of this fact, not in spite of it.
If you have a sourcing group in place, let them source. Engaging stakeholders and working with them to develop scopes of work or build requirements are still responsibilities they will need to have, but if they don’t have a say in the decision making process, then they can’t truly be an effective change agent for the organization. We need to stop letting the inmates run the asylum.
“You know Tom, I think it’s about time we switched from Frame Relay to an MPLS network.”
Then imagine that the Director of IT had no choice but to do what Marketing said.
That scenario would never happen of course, and there is a reason why it would never happen. It’s because Marketing is responsible for making marketing decisions and IT is responsible for making decisions about IT. That Marketing Manager and IT Director spent a good part of their career learning their trades, and they were hired because of their knowledge in those specific areas.
Still, every day we continue to allow people with no background in purchasing or strategic sourcing make decisions about which vendors their company should utilize, and what a fair price is to pay for those goods and services.
So, why do we do this? I believe it has a lot to do with traditional organizational structure. Purchasing departments were originally created as a tactical shared service. The company needed “stuff” and someone had to buy it. Departments would hand a requirement to purchasing and say “Here is what I need, purchase this for me.”
In the last few years many companies have created another layer to their organization called Sourcing. The sourcing department is normally considered more strategic than purchasing, designed to offset risk and reduce costs. They are asked to work across all departments and all locations to ensure the best overall value is received from the supply base. Yet rarely will you hear anyone in the organization go to the sourcing team pro-actively and say to them, “Here is what I need, find a source for this for me.”
In every organization I currently work with, the sourcing group’s ability to make decisions on vendor selection is limited, if not completely non-existent. End users – the one’s defining the requirement – still get to say who they want to utilize, even when that decision has no business case behind it.
Here are two recent examples I’ve come across in my work.
The first is a company that spent roughly $2 million a year on janitorial services across multiple locations. The sourcing group spent a great deal of upfront work defining the scope of work and ensuring the facilities team agreed with the RFP. They brought in all vendors for facilities tours and made sure the stakeholders walked through each building with them, describing exactly what service levels were required. At the end of negotiations, the two primary incumbent vendors came back with proposals that equated to about $100K in savings each. An alternate with a stronger national footprint, meticulous references and well-established service team provided a proposal that exceeded $500Kin savings.
Based on the facts, you would assume the company would move ahead with the new vendor. But the facilities group had concerns with the switch. What were their concerns? They had no prior experience with the new vendor. And that was it! When challenged on the decision, they also cited a faulty RFP process that failed to properly explain the required service levels – even though they helped build the RFP’s and had the opportunity to explain service levels directly to the vendors.
So what did sourcing have to do in order to get the organization to make the right decision? In this example, they had to build up internal sponsorship in order to get a decision from the top. They stated their case for 3 months, before finally the head of facilities agreed to proceed with a new vendor. Over that 3 month period, the company overspent by $125K, and no one (besides sourcing) seemed to mind.
In another example, a sourcing group worked hand in hand with IT to develop a scope of work for hiring an MSP that would assist them in deploying new software that was critical to the company. When the bids were in and lined up, two incumbent vendors had the best overall proposals. Evaluating the proposals side by side without looking at the name of the vendors, it was clear that Supplier B would be the selected vendor. They had more experience in this type of deployment, their team was more qualified, and their price was $200K less.
But the names of the vendors were not hidden, and the IT group decided to go with Supplier A, because that was their “preferred” vendor. In other words, IT liked working with them better. Sourcing had no ability to change their mind, but did manage to negotiate with the preferred vendor to get a more competitive price. In the end, the feedback from the IT team was “Sourcing appeared a little too price-focused during this engagement.”
In both of these cases, Sourcing was effective at engaging stakeholders and utilizing either change management (in the first example) or negotiation prowess (in the second example) to obtain savings for the organization. But in both cases it required a huge amount of extra time for the sourcing team, which meant it took longer to implement the savings. It also meant that sourcing had to focus on dealing with internal struggles instead of going out and starting a new engagement – which is an opportunity cost that is difficult to quantify.
The other commonality in both cases was that the stakeholders group challenged the sourcing team and the results at the end of the engagement, even though they were brought in as part of the team from day 1. Not only were they allowed to make bad decisions, but they also attacked the team that tried to get the organization to the right decision, which will likely lead to future problems with the two groups working together.
The reality is, until we stop allowing our IT or Facilities departments (or Marketing, HR, Finance, Admin) to make decisions about the source of supply, there will be untold dollars left on the table. Those departments weren’t trained to go to market, and they rarely have a strong business case for why a particular vendor is used. The reason companies pay more than you should is because of this fact, not in spite of it.
If you have a sourcing group in place, let them source. Engaging stakeholders and working with them to develop scopes of work or build requirements are still responsibilities they will need to have, but if they don’t have a say in the decision making process, then they can’t truly be an effective change agent for the organization. We need to stop letting the inmates run the asylum.
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