I’ve been communicating over the last several months with a very large global company about some substantial procurement initiatives that they’ve been exploring. These initiatives include outsourcing their tail spend management; which in a company of this size is substantial (think hundreds of millions of dollars annually). So needless to say, while they consider this to be “tail” spend, it still has a significant impact to the bottom line of their organization’s stock price.

Overall, Source One and its parent, Corcentric, are ideally suited to help this potential customer on their journey to improving their tail spend under management; as we have both services and technologies that can be customized for their specific needs. This scoping exercise has been a fun process; working with their stakeholders to understand their goals and crafting realistic obtainable solutions that would minimize risks usually found in traditional BPO outsourcing.

Not all of it is fun of course. Afterall, this is still a sales process. That means introduction calls, scoping calls, refining the scope follow up calls, a formalized RFI process. An RFI response review meeting, sample data exchange, revamped data, presentations, more calls, more presentations, and we could go on and on. However, this is all to be expected as part of the prospect’s due diligence process. In fact, its refreshing to see them go through this process of truly developing and refining their need; and not just hitting the market with a poorly written RFP for procurement BPO services; like many other companies often due. It also shows how mature they are as a procurement organization, that they are putting this much effort into the development of specifications and ultimately the selection of a tail-spend management provider.

But recently, things just took a turn for the worse. And unfortunately, its likely that same procurement “maturity” that got them in this situation. This process, while it had its formalities (RFI), has been a relatively open dialog with us; and presumably some other potential tail spend management providers. But now, as we’re finally approaching a revised scope, we were notified by this prospect that the next step in the process would be to participate in a “Legally Binding Reverse Auction”. Now, while I’m not a huge fan of reverse auctions to begin with, they certainly do have effective use cases; but only with highly commoditized products or services. The augmentation and outsourcing of spend management is hardly a commodity, and each supplier presumably has a wildly different solution and pricing model looking to achieve the same goals. That means, that the auction can only be set up in a way that has a predetermined pricing structure (that likely only one provider offered), and its left with everyone else being able to not participate or not articulate their solution through the reverse auction.

Not a problem, we thought, these people have been understanding through the sales process, they should listen to reason when us (and our competitors) express that we don’t think a Reverse Auction will accomplish what they need. We also wanted to have them understand that a Master Services Agreement should be reached before a “legally binding” anything should happen as it relates to price. We figured they’d understand. But we were wrong. Here’s why. They are using the wrong metrics to measure their existing procurement team.

Specifically, somewhere along their journey of procurement sophistication, they were convinced that a percentage of all of their annual spend must run through a reverse auction each year. Their procurement team’s compensation plans actually measure them on that metric. Well guess what, if they are outsourcing their tail spend, someone realized that if they run this as a reverse auction, then they hit their entire “spend through reverse auction” goal for the entire year. And worse, the powers-that-be are not willing to make an exception or change that metric; as they had some high-priced consultants tell the executive team a few years back that this was one of the key ways to measure the success of procurement.

Now, my intention with this rant isn’t to debate the merits of reverse auctions. Nor do I want to get into a debate with a reverse auction tool provider about how you can run services like these through this platform… Instead, I simply want to raise the warning that as procurement as a function evolves, and your organizations mature, you should be constantly looking to refine the metrics that are used to measure your procurement team’s success. You may just find that while those metrics, years ago, helped you evolve as a company, they are now the same metrics that are making you less profitable.

So if you measure your procurement teams on things like:

  • Quantity of transaction that go to RFP 
  • A minimum of 3 suppliers being invited to an RFP 
  • % of spend that goes to reverse auction 
  • % of spend through diversity suppliers without regard to total cost 
  • Universal payment terms (without understanding impact to price or supplier) 
  • % of completion of supplier performance score cards without segmenting suppliers first 
You might just want to consider looking again at what a modern-day procurement organization is really capable of.  I guarantee you that some of those procurement metrics are costing you money.

Contact the Procurement Advisory Consultants at Source One, we can help set you up with the right procurement metrics unique to your business.
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William Dorn

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