What the CEO Needs to Know – About Value Flow and World-Class Supply Chain Management

What the CEO Needs to KnowMost CEOs do not understand what World-Class Procurement and Supply Chain Management (PSCM) is, or how to implement it in their organisation. In our experience most CEOs rely on outdated and outmoded organisational structures with misaligned KPIs across Functions. Why is this, and how can it be resolved?

Outdated Silo Thinking

Having undertaken hundreds of IIAPS benchmarking exercises in a wide range of organisations it is clear that companies rely on outdated and outmoded organisational structures. Most organisations have a traditional Board structure with a wide number of Functions (such as Strategy, Finance, Marketing, HR, IT, Legal, Operations etc.) represented directly or indirectly.

The PSCM Function is normally not directly represented at Board level. Most often the PSCM Function reports to the Finance Function or, in some more advanced companies, through the Operations Function. Sometimes the PSCM Function’s reporting line is divided between the Operations Function for Direct/Production supply items/spend; but the Finance Function controls Indirect/Non-Production supply items/spend.

Traditional Operating Models - Silo Management

Unfortunately these approaches are all based on what is now outdated and outmoded Silo Management thinking, dating back to a much earlier era of heavily insourced manufacturing production within national economies; strongly influenced by late 19th Century thinking about the efficacy of clear divisions of labour within the organisation.

Misaligned KPIs

The major problem with Silo Management is that it destroys effective Value Flow Management within an organisation. This is because organisational Functions engage in constant turf wars, and each believes that its Function, rather than any of the others, is uniquely relevant and strategically important to the delivery of value in the organisation.

Such defensive turf wars get in the way of the effective delivery of value and also lead to a misalignment of KPIs. For example, it is common practice for Marketing to have KPIs that reward sales and revenue generation; while Operations may have KPIs that reward uptime, on-time delivery and productive effectiveness; but PSCM normally only has one KPI that rewards continuous cost reduction.

The inevitable consequence of this approach is revealed in a simple example, which we have witnessed many times.

The Argument between FunctionsOrganisations reward Marketing for increasing revenue and sales, but without understanding whether Operations can actually produce the goods profitably or on-time or to the quality required by the customer. Normally the internal culprit for this misalignment in our modern outsourced world of production and supply is ultimately seen as the PSCM Function. This is because PSCM is measured by its ability to deliver lower costs and often, therefore, cannot deliver the supply of the necessary items to meet the quality, cost and delivery requirements required by Operations and promised by Marketing to the customer.

Resolving the Silo Management & Misalignment Malaise

Ultimately everyone in the organisation suffers from this failure to deliver value to the customer. The company alienates or loses its customers and also fails to appropriate value for itself from the sale of its goods/services, resulting in declining profitability and market share.

Why does this misalignment occur so regularly? The simple answer is because Silo Management structures and KPIs create barriers to the understanding of the flow of value through and within the organisation. There is a need throughout the organisation for the flow of value from external supply, through internal production to external sales to be thoroughly understood, so that all Functions within the organisation are measured by appropriate KPIs. These should always be linked to the direct impact of each specific Function on the quality, delivery and cost of the supply items that must be sourced and transformed into higher value-added goods/services for end customers.

It follows that if this type of Value Flow Management with aligned Functional KPIs is to be used to manage organisations in the future, it also raises serious questions about the current way of thinking about the importance of particular Functions, and which should be represented at Board level. World-class organisations do not just accept the need for aligned Functional KPIs focused on Value Flow Management, they also radically change their organisational power structures internally.

Value Flow Operating Model

In most advanced organisations of the future historic outdated and outmoded Silo Management structures will be replaced by much leaner and focused, but aligned, Board structures, that continually monitor the flow of value through and within the organisation.

In these organisations Boards will have only 5 Members: The CEO; a Chief Financial & Administrative Officer (CFAO) representing all indirect Functions and cost centres; a Chief Marketing Officer (CMO) focusing on customer wants and needs; a Chief Internal Supply Officer (CISO) creating the internal supply of goods and/or services; and, last but not least, a Chief External Supply Officer (CESO) responsible for all external procurement and supply chain management.

The KPIs of these five key officers will be primarily aligned with their direct impact on the quality, cost and delivery of the goods/services that pass through the organisation from external suppliers to end customers. That is aligned world-class marketing and sales; world-class production; and, world-class procurement and supply chain management.

Few, if any, organisations currently even begin to understand the misalignment of KPIs and Silos. Maybe your CEO needs to understand why creating a value flow logic is so important?  If you think he/she does need to understand why, then please do send them a link to this blog.

For more information on IIAPS thinking please visit the IIAPS website.

Competence Development and Value Delivery

Why Traditional Procurement & SCM Qualifications and Training Fail to Deliver ‘Real Business Value’

AdvQualMost organisations fail to see much ‘real business value’ delivered after they have undertaken extensive competence assessment and then internal and/or external training to improve the competence of their staff in Procurement and Supply Chain Management (PSCM).

The reason for this is because most of the training received is either too theoretical and/or completely unrelated to the delivery of value within the ‘real-life’ and ‘real-time’ day-to-day operations of the organisation. Why is this, and how can this malaise be resolved?

Problems with Current Training & Competence Development Offers

Most organisations have a limited number of choices when selecting the most appropriate PSCM training courses for their staff when pursuing competence development initiatives. They can either undertake internal training (normally through the use of their own staff and the creation of their own internal Training Academy) or they can use external providers (some of which offer certified Professional or University/Academic qualifications).

In practice most organisations use a combination of these two approaches. Normally, a segmentation is undertaken of the PSCM staff during the initial competence assessment programme, in order to identify which staff should receive basic internal training (sometimes supported by external trainers); and which should receive more advanced external training and qualifications.

When undertaking external training the choices are normally between Professional Bodies, that award their own Certified Qualifications based on their national standards, or postgraduate academic qualifications offered by Universities and Colleges, based on nationally regulated and accredited standards.

Having benchmarked hundreds of organisations globally it is clear that whichever of these internal and/or external routes to competence development is selected there is considerable disquiet amongst those funding these programmes. The major concerns appear to be about the effectiveness and efficacy (value for money) of these approaches. The following major issues recur:

  1. Too much theoretical rather than practically relevant training
  2. Too much focus on best practice in industries/sectors that are not relevant to the issues facing the funding organisation
  3. Too much focus in training on case studies that are irrelevant to the needs of the funding organisation
  4. Limited evidence of heightened skills and capabilities relevant to the funding organisation amongst staff after training
  5. Immediate loss of the most able staff after advanced training, with no real tangible value for money or ROI benefits being provided to the funding organisation from the training

All of this adds up to a major indictment of current training and competence development offers due to a clear lack of ‘real business value’ being delivered, with limited tangible Return on Investment (ROI) for funding organisations.

The IIAPS Solution – Delivering ‘Real Business Value’ Through ‘Real-Life’ and ‘Real-Time’ Competence Development

Given these serious issues with current training and competence development offers IIAPS has developed a unique and novel approach to the award of its own International Green, Red & Black Belt In Advanced Purchasing & Supply Management qualifications.

Belts

In order to ensure that all students deliver ‘real business value’ to their funding organisation all participants in the Institute’s Belts courses will in future have to undertake their training by delivering a category sourcing strategy for their funding organisation. This means that all training and mentoring support provided by the Institute during the training and certification process now takes place in the context of the ‘real-time’ and ‘real-life’ development of a sourcing strategy with a cross-functional team within the funding organisation.

Furthermore, while IIAPS trains the staff member to become the equivalent of an expert IIAPS consultant in strategic sourcing and category management, this competence development work is continuously focused on delivering significant improvements in the quality, cost and delivery performance of a particular category of supply/spend within the funding organisation. The student can only qualify for a particular Belt if they are able to develop an effective sourcing strategy, and also then take it to market and negotiate and deliver a successful sourcing strategy with suppliers in the ‘real-world’.

Finally, the funding organisation is continuously involved in the process because it works with IIAPS and the staff member being trained to select the sourcing strategy to be developed and then taken to market. The funding organisation must also sign-off that significant value for money has been achieved before the student can qualify for certification.

In this way we believe that a new approach to competence development is now available that overcomes the problems with current offerings. It is an approach that delivers ‘real business value’ in the context of ‘real-time’ and ‘real-life’ sourcing strategies. It is, therefore, the only course offering that offers a guaranteed ROI so that the course of study should always be self-funding for participating organisations.

To find out more about the IIAPS approach visit our website.

Sourcing Portfolio Analysis: Power Positioning Tools for Category Management & Strategic Sourcing

SPA CoverThe latest book introduces Sourcing Portfolio Analysis. This is one of the key methodological tools used by the International Institute for Advanced Purchasing & Supply (www.iiaps.org) to develop advanced competence in category management and strategic sourcing.

In this book current orthodox Tactical Spend Management thinking about how to undertake category management segmentation; and how to develop appropriate sourcing strategies to leverage improved value for money from suppliers and supply chains, is challenged. In particular, the standard, and widely used, analytic and conceptual approaches developed by Kraljic (1983) and Porter (1979), as well as the Purchasing Chessboard (2008), are critically analysed.

The Need for a Paradigm Shift

Having identified serious gaps in the logical coherence and in the analytical rigour and robustness of these current approaches, the author calls for a ‘paradigm shift’ in thinking about how to undertake category management and the development of appropriate sourcing strategies. This revolution is predicated on the use of Sourcing Portfolio Analysis as a more effective tool for enabling managers to make choices about the most appropriate sourcing strategies and tactical levers to use when seeking improvements in value for money from suppliers.

This new tool is created by linking criticality analysis and power positioning analysis to create a much more rigorous and robust segmentation of ‘categories of supply’, rather than ‘categories of spend’. Using a 16-Box Matrix, and given a buyer’s current power and leverage position, over 32 potential strategic sourcing strategies are identified for static leverage. A further nine potential strategies are also identified that enable buyers to improve their future power and leverage position using dynamic leverage.

A Decision-Tree with decision rules is also provided to enable managers to understand all of the major issues they must address, and the key questions they must answer, if they wish to be fully competent in identifying the most appropriate strategic sourcing options within a world-class category management decision-making process.

Sourcing Portfolio Analysis provides a much more rigorous and robust way of thinking about strategic sourcing options and choices than any of the alternative approaches currently available. It also provides the potential groundwork for a science of strategic sourcing.

Sourcing Portfolio Analysis is published by Earlsgate Press. ISBN 978-1-873439-54-8. It can be ordered from Amazon UK or through Earlsgate Press.

The QV Way to Improve Category Management & Strategic Sourcing

FlowIn a series of previous blogs based on our benchmarking data (see also the PSCM Index and our World-Class or Best-in-Class? White Papers), we outlined the 12 Major Causes of Sub-Optimal Category Management and Strategic Sourcing, and promised to provide a series of blogs (The Problem of Cross-Functional Involvement & Buy-In and Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In) on how IIAPS believes these issues can be resolved.

In this blog we explain our QV Methodology. This approach is used by IIAPS to improve staff competence when developing category strategies, and addresses some of the key causes of sub-optimality that we identified earlier, in particular:

  • Lack of cross-functional buy-in so that all value for money options are never considered.
  • Lack of early involvement so that options are closed.
  • Lack of embedded performance management culture using rigorous and robust KPIs for all categories of spend, with focus only on price/cost savings rather than value for money KPIs.
  • Lack of embedded and on-line processes/systems to manage categories of spend, and to undertake sourcing strategy development and/or supplier relationship management.
  • Lack of use of sophisticated power and leverage positioning analytical tools to develop sourcing strategies.
  • Lack of management, leading to staff reinventing the wheel.
  • Lack of fully competent staff, with a fully rigorous methodology to analyse all value for money trade-off options.

To overcome these obstacles it is necessary to improve processes and staff competencies. This is achieved by the use of a rigorous and robust analytic methodology for the development of sourcing strategies at the category level. This type of methodology must focus on how to improve Value Flow Management by improving leverage of value for money (not just cost down).

The QV Methodology focuses specifically on understanding where, and how, improvements can be made in sourcing technical and/or commercial value from suppliers. To achieve this, it is necessary to undertake Power Positioning. This means understanding the resources that provide value leverage opportunities for buyers relative to suppliers.

In our view, the objective situations that buyers and sellers always find themselves in are outlined below:

The Power Matrix Figure

To be able to position suppliers in this Power Matrix there are 4 key questions that must be asked:

  1. What are the objective power resources currently available to us as a buyer, and to particular suppliers?
  2. Given this, what is the current and future potential power position we have to manage?
  3. In order to leverage improved value for money what are the full range of sourcing options available to us?
  4. Given this, which sourcing option (or options) should we use to achieve improved value for money?

The ability to answer these questions correctly for each potential supplier in each category (and sub-categories) of supply is essential if competence in value leverage is to be achieved.

The central problem that we have experienced is that most practitioners do not have the competence or tools to understand where they are currently located (or could be in the future) in the Power Matrix.  This problem is most acute for Line Managers/Specifiers than it is for buyers in the procurement function.

As a result, most companies do not appear to possess a Category Strategy Challenge Methodology, or On-Line or Excel-based Knowledge Management System.

It is for this reason that the QV Methodology was created to:

  • assist buyers in engaging strategically with the business to discuss value for money issues/options;
  • understand their power resources and power positioning circumstances; and,
  • analyze the full range of sourcing options available to them to deliver improved value for money

This approach is normally operated through a two-day facilitated workshop with cross-functional members of a category team, and focuses on a specific ‘real-time’ sourcing strategy.

QV Workshop

The approach has the following format:

  • Day1: Identification of VFM KPIs & Key Demand & Supply Characteristics Impinging on Power & Leverage
  • Day 2: Identification of Current & Future Power Positions & Full Range of Sourcing Options Available, with Recommendations for Most Appropriate Strategies to Deliver Improved VFM

This methodology has 5 Key Benefits of engaging and educating Line Managers & Buyers to:

  1. VFM Issues and KPIs Development
  2. Key Demand & Supply Management Issues & Questions
  3. Key Power Resources & Power Positioning Issues & Questions
  4. The Full Range of Sourcing Options Available
  5. Creating Cross-Functional Buy-In to the Most Appropriate Strategies to Deliver Value for Money Improvement.

While this provides tremendous cross-functional buy-in to sourcing strategy development, alone it is not sufficient to be a best-in-class performer.

The key differentiator of leaders and laggards is the ability to codify all of the relevant information collected in such cross-functional workshops, so that it becomes a part of the overall knowledge management process within the company.

IIAPS has developed a methodology for category management (either on-line or in a Excel spreadsheet) that allows organisations to embed the QV Way of Thinking, while also allowing them to create their own bespoke knowledge management and shared learning capability (see here).

Few companies possess this capability today. We recommend the QV Way as part of a common-sense approach to category management and strategic sourcing.

Further Reading
  • Cox, A., et al, Power Regimes, Earlsgate Press, Stratford-upon-Avon.
  • Cox, A., et al, Supply Chains, Markets and Power, Routledge, London.
  • Cox, A., et al, Business Relationships for Competitive Advantage, Palgrave Macmillan, Basingstoke.
  • Cox, A., et al, Supply Chain Management: A Guide to Best Practice, Financial Times/Prentice Hall, London.
  • Cox, A., ‘The power perspective in procurement and supply management’, Journal of Supply Chain Management, 2001, 27 (2).

Value Flow Management: Value-Driven Category Management & Strategic Sourcing

value-redOur previous discussions about how to resolve the problem of a Lack of Effective Cross-Functional Involvement & Buy-In focused on the standard internal conflict management techniques that are necessary when adopting a Tactical approach to category management and sourcing.

Our conclusion was that, while this type of approach can deliver significant price and cost down benefits (and especially if the company is facing a strategic cost challenge), in the end it is always likely to be sub-optimal (see our blog on Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In). This is because Procurement-led category management strategies necessarily generate significant internal conflict.

This occurs because the Procurement Function is normally attempting to ‘do’ category management as a ‘cost-down project’ to the rest of the organisation, rather than understanding that what should be occurring is the embedding of a cross-functional end-to-end process that manages the flow of value within the company, and between suppliers and end customers.

The over-riding problem with Tactical approaches is that they always generate internal dissonance and conflict, because the Procurement Function only sees category management as a mechanism to help deliver its KPIs, rather than as a strategic process (in which the Function may only play a supporting role) to assist with the delivery of the strategic goals of the organisation as a whole.

In what follows some case examples will be used to assist understanding of the difference between a Strategic (Value Driven) as opposed to a Tactical (Price/Cost Down) approach to category management and sourcing.

Understanding Value: The Supply v Spend Dilemma

In our earlier discussion of Tactical Solutions to the Lack of Buy-in and Early Involvement) we focused on 3 cases, in which the judicious use of internal power & leverage analysis, linked with effective change management, provided opportunities for significant reductions in costs.

While these are excellent examples of what a Procurement-led, Tactical approach can achieve they fall somewhat short of the value-based improvements that can be delivered (and without the need for internal conflict resolution) if a more Strategic (Value Driven) approach is adopted.

To understand this difference one must first recognise that there is a fundamental short-sightedness in the way in which most Procurement professionals think about category management.  This is revealed most starkly in the standard explanation of what is to be managed, namely: ‘categories of spend’.

More than anything else this ‘nomenclature’ demonstrates why Procurement professionals fail to understand what is the ‘strategic purpose’ of their organisations, and why categories need to be managed.

It may come as a shock to some, but organisations do not exist strategically in order to reduce the costs of ‘categories of spend’; on the contrary organisations exist in order to generate profits from the delivery of ‘categories of supply’ to end customers.

For end customers there is then always a Value for Money (VFM) trade-off to be considered, when they purchase any goods/services. This trade-off refers to the value of what is supplied technically (in terms of quality and delivery service levels) relative to what is its total cost of ownership.

The reason so much category management work is ‘non-strategic’ arises from this VFM trade-off issue, as between understanding categories as ‘valued supply items’, or seeing them merely as ‘spend items’.

What appears to have happened recently is that, because Procurement is only ever managed against cost down targets, and because it has adopted category management as the best tool available for it to reduce costs through standardisation and consolidation techniques, category management has become a ‘one-legged stool’.

By this we mean that Procurement often sees category management merely as a project-based process that is to be imposed on the organisation as way of reducing costs, rather than as a ‘three-legged stool’ in which Quality, Cost and Delivery have to be analysed and managed as trade-offs with the business strategically.

The consequence of this dominant Tactical way of thinking is the inevitable internal conflict that arises in the business when the Procurement Function tries to ‘do’ this to other Functions, in pursuit of their own (rather than other Functions’) performance targets. The result is normally a lack of buy-in and resort by Line managers to post-contractual opportunism once contracts have been awarded, as we outlined previously (see the blog on the Problem with Cross-Functional Involvement & Buy-In).

Despite this, as we show below, by adopting a Strategic (Value Driven) approach to category management, and by working collaboratively with the relevant Line managers and Procurement staff, it is possible to radically transform these unfortunate post-contractual outcomes and generate cross-functional buy-in and early involvement.

Examples of Strategic Value Flow Management
‘From Day Rates to Project Effectiveness & Efficiency’

In a previous blog we described a situation in which, despite the best efforts of the Procurement Function to end single source supply with the most expensive supplier in the market, Line managers post-contractually ignored the framework agreements put in place with two other lower cost suppliers, and continued to award 100% of the volumes to the highest priced supplier on a bundled equipment/staff day rate basis.

Obviously, Procurement saw this strategy as a failure for their desire to reduce costs.  We were asked to help, and we immediately brought the relevant Line managers and Procurement staff together into one of our two-day QV® Challenge Workshops (see blog The QV Way) to analyse the issues.

QVWorkshop

The reason for doing this is that it was obvious that Procurement had not engaged sufficiently with Line managers to understand either the reasons why they preferred the technical performance of the higher priced supplier, or why they would continue to work with them, even if the cost was considerably higher than the lower cost suppliers.

The upshot of the Challenge Workshop was an understanding of the following key VFM drivers for this category of supply:

  1. Quality of technical equipment performance was critical to project delivery
  2. Availability of the right level of technical competence/know-how was key to project delivery
  3. Costs were relatively insignificant when compared with the impact on revenue flow of having the right technical staff and equipment on site

Given this VFM trade-off it is hardly surprising that Line managers would choose to work with suppliers who delivered their primary targets (i.e. project technical efficiency and effectiveness in generating revenue flow and profitability) rather than the targets established by Procurement (i.e. reduce day rate costs irrespective of the impact on technical performance).

Interestingly enough, once we had convinced Line managers that we were not solely interested in cost reduction targets, and that we had a genuine interest in their VFM trade-off concerns, it was then possible to work with them on many other aspects of their sub-optimal management of this category of supply.

We quickly established that there was no clear performance data that actually supported the view amongst Line Managers that the most expensive supplier was technically superior. Eventually, Line managers were forced to concede that their preference for the most expensive supplier was not based on fact, but merely on their ‘subjective preferences’, without the use of objective selection criteria.

Once we had established that the category was not being professionally managed technically, we were then able to shame the Line managers into establishing objective KPIs for technical and commercial performance. This allowed us then to identify the baseline performance of the incumbent (and most expensive) supplier, and also convince Line managers of the desirability of allowing other suppliers the opportunity to demonstrate their technical (NOT commercial) prowess.

Over a number of small pilot projects Line managers gradually began to compare the performance of suppliers they had never used before, and they (not Procurement staff) decided that the technical performance of the new suppliers was as good (if not better) than the incumbent supplier. Given that the cost was significantly lower (sometimes by over 40%), eventually Line managers completely replaced the previous incumbent with 3 commercially hungry and technically able suppliers.

In this example, we can see what can happen when a Strategic (Value-Driven) as opposed to Tactical (Price/Cost Down) approach is taken to category management.

While there was some tension at the beginning of the process as the current approach by Line managers to category management was discussed and challenged, by focusing on the KPIs of Line managers rather than on those driving Procurement, it was possible to have Line managers understand that it was they that needed to manage things differently. This was because they were making serious errors in delivering against their own technical KPIs.

The technical benefits that flowed from this exercise were substantial, and these simply could not have been delivered if the conversation had only been about price and cost.  Significant cost savings were also made, but without us ever really focusing on these as the primary driver of the strategy.

In the end a cross-functional team (primarily led by Line managers) saw that a professional approach to category management was able to deliver significant improvement in value. This included improvements in project efficiency and effectiveness that impacted on revenue flow, profitability and technical performance, as well as reducing the total costs of ownership.

Improving value in this way is the goal of all Category Vale Flow Management exercises, as an additional short case below explain.

From Widget Costs to Fundamental Marketing & Manufacturing Strategy Realignment

In another VFM exercise we were involved with, a company asked us to assist with a problem they had with the excessive costs and poor availability of a small tactical widget for one of their major products.

From the Procurement perspective the problem was that they had too low a level, and infrequency, of demand so that they had few opportunities for price leverage. They simply could not get better prices, or even ensure stock availability, and this sometimes caused delay in completing products to deliver to customers.

Having analysed the widget sourcing strategy with a cross-functional team it soon became apparent that the real issue was not the price of the widgets, but the complete misalignment of demand and supply alignment in the marketing and manufacturing strategy of the company.

The company had adopted a lean manufacturing and supply model without fully understanding that this approach could not be adopted in the absence of a standardisation strategy when offering products to customers.  In practice the company was promising customers any types of product within 10 days of order to shipment, but without the ability to deliver manufacture and/or supply against this commitment. The result was low profitability and dissatisfied customers, who rarely received goods on time because of the lack of buffer stocks in the supply chain to make good against orders.

No amount of competitive price challenges could hope to resolve these problems. In the end the company had to completely restructure its go-to-market offers and standardise its product lines around 3 standardised and 1 unique/bespoke offers. The result was aligned demand and supply, increased product sales, higher levels of customer satisfaction and, eventually, as volumes for standard parts were aggregated—lower input prices for widgets.

This example once again demonstrates the benefits for categories of supply from the adoption of a Value Flow Management approach that focuses on Strategic value for money rather than just price/cost considerations.

Key Learning from these Cases

The two cases above show that achieving buy-in and early involvement did not occur just because Procurement believes it is a ‘good’ idea.

On the contrary both cases demonstrate that when strategically important categories of supply are being analysed it is essential to persuade staff from other Functions that there is something in the process for them.

The key learning that arises from this understanding is as follows:

  1. It is easier to win buy-in and early involvement for category management implementations if the exercise focuses on the KPIs being managed by cross-functional colleagues, rather than on those of the Procurement function.
  2. Never commence a category strategy by discussing price /cost down outcomes or targets.
  3. Always focus first on the technical value for money problems (i.e. quality and service delivery etc) that cross-functional colleagues have to deliver against.
  4. It is imperative to win the hearts and minds of cross-functional colleagues by helping them to meet their targets first, rather than yours.
  5. Having a methodology to understand the relative criticality of technical and/or commercial inputs, and in relation to other sources of corporate value (i.e. Value For Money trade-offs) is a prerequisite of being able to communicate and engage with cross-functional partners, so that they buy-in to category management and strategic sourcing.
  6. You must also possess a methodology for understanding how to undertake Value Flow Management within the organisation.
  7. This will be supported if an end-to-end category management and strategic sourcing process is created to drive continuous improvement and knowledge management.
  8. In the end it is best if cross-functional colleagues rather than the Procurement function believe they invented and manage the new strategic sourcing process.
  9. The Procurement role is to act as the guardian of the process of cross-functional sourcing excellence.
  10. Ownership of the process must eventually be driven by the business, and that means by senior cross-functional colleagues if it is to be a Strategic (Value Driven) rather than Tactical (Price/Cost Down) sourcing process.

How we help organisations to achieve these Strategic (Value-Driven) rather than merely Tactical (Price/Cost) based outcomes operationally is explained in more detail in our blog: The QV Way to Improve Category Management & Strategic Sourcing.

Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In

cross-functionalityBuilding on our previous analysis of the 12 Major Causes of Sub-Optimality, in a recent blog we outlined why a lack of effective Cross-Functional Involvement & Buy-In is one of the major reasons why effective organisation-wide category management and strategic sourcing cannot be implemented.

It is clear, therefore, that understanding how to achieve senior management buy-in, so that effective cross-functional early engagement occurs, is a prerequisite of successful category management and strategic sourcing.

Achieving buy-in means: having senior managers fully understand the improved value that an effective category management and strategic sourcing approach can bring to the business.

If this is achieved it is normally the case that senior managers will then authorise early involvement, and provide the scarce senior technical staff time and resources to work with Procurement functional staff.  Achieving this is not, however, a simple task. One might argue that it is the single most difficult change management task for a CPO to achieve—and one which in our experience few are fully qualified to undertake or deliver effectively.

Despite this we have worked successfully with CPOs and senior category managers to overcome the lack of buy-in and early involvement problem.  By focusing once again on 3 of the 4 indicative case studies discussed in our previous blog we will explain some of the techniques (summarised as key learning) that can be used to resolve this dilemma.

Overcoming Obstacles to Early Cross-Functional Involvement & Lack of Buy-In

It is obvious that life would be simple if a CPO had nothing more to do than to explain what category management is, so that senior managers and their technical middle management colleagues could change their current behaviour and adopt a more effective cross-functional approach to strategic sourcing.

Unfortunately, in our experience, life is not so simple and there is considerable evidence of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and across all of the organisations we have worked with.

This is because attempts at persuasion by Procurement staff are often ineffective at bringing about the necessary change management required.  The primary reason for this failure to win buy-in is because the business often sees category management as nothing more than an attempt by the Procurement function to impose a new approach on the organisation, in order that it can achieve its own cost reduction targets.

This failure is normally self-inflicted by the Procurement function because of an attachment to a Tactical (Price/Cost Down) rather than Strategic (Value Driven) approach to category management, which alienates everyone outside the Procurement Function before any of the potential benefits can be identified.

Despite this we have found that, even if the Procurement Function is wedded only to a Tactical approach, it is still possible to win a measure of buy-in and early cross-functional involvement, so that significant price/cost down improvements can be achieved.

We explain our key learning about the change management techniques that may assist this type of Tactical (Price/Cost Down) success by reference to three of the cases discussed previously.

Shoot One to Encourage the Others to Open the Door

In this case, the refusal by the Head of a major Business Unit in a multi-Business Unit company to participate in the embryonic category management strategy being developed by the newly created CPO was overcome by an effective use of internal power & leverage analysis and management.

Essentially all senior stakeholders were identified, analysed and then a power and leverage transformation strategy was developed focused on building buy-in amongst like-minded senior ‘allies’ in the company, so that the power of recalcitrant BU Heads was isolated.

The upshot of this strategy was a decision between us and the COO that (given the strategic importance of cost reduction at that time to the company) the first recalcitrant BU Head who failed to agree to a consolidated category management approach would be their removal from their job. The thinking was based on the French General Staff’s strategy in the First World War, namely: “We shoot cowards for treason; to encourage the other troops to obey orders!”

The result of this strategy, which cost one senior BU Head his job, was a 40%+ reduction in the costs of ownership over a three-month period through the adoption of a company-wide consolidation approach to category management.

Kill the Snake with Sunlight

In our second case several Heads of the Business Units stymied the category management transformation initiative by agreeing to provide support in formal meetings, but then refusing to cooperate in practice.

This meant that the category management approach could not be developed uniformly across the business. Furthermore, the relative importance of cost reduction was not as transparent to the COO of this company, and there was no support for the same First World War strategy as discussed above.

Given this, having segmented the BUs using standard internal power & leverage analysis to identify ‘allies’ and ‘opponents’, we linked ‘allies’ with the relative business criticality of the categories of spend that they managed. This allowed us to identify the ‘allies’ managing the categories that provided us with the greatest scope to demonstrate the potential for significant cost reduction for the business as a whole.

By working closely with ‘allies’ who were willing to provide the necessary time and resources we were able to make cost savings of between 30% – 80%. As a result senior managers at the C-Level in the company began to take notice. Gradually enlightenment dawns, and especially if there is a serious cost challenge in the business. In these circumstances, over time waves of categories normally start to be offered for treatment independently by BUs as senior managers recognise the benefits of buy-in and early involvement.

Break the Log–Jam

In our third case, despite some success with some category strategies in a company, and apparent buy-in from senior managers, middle managers on the technical side became the effective barriers to effective implementation. Some of these managers, when forced to attend meetings, simply refused to provide the data to allow early engagement so that demand and supply optimisation options/alternatives could not be fully understood.

This often arises because middle managers have already decided what they think is the best option (whatever the cost), and they do not want to see alternatives put on the table for consideration.

Although persuasion about the benefits of potential alternatives is always the preferred starting point, sometimes this strategy is simply not feasible, and especially when middle managers jealously guard their status and position against Procurement staff.

If persuasion does not work then the only other recourse is to ‘break the log jam’ by resorting to an internal conflict over roles and responsibilities.  This has two potential targets:

  • First, an attempt to replace the recalcitrant technical staff in the existing process to find more congenial technical partners.
  • Second, the mandating of early disclosure of all relevant data as part of a new cross-functional process.

Obviously any such strategy is replete with potential danger, and success will much depend on the current and future balance of power between senior ‘allies’ and ‘opponents’.

In this particular case, the failure to persuade middle managers of the benefits of sharing led to serious internal conflict, with appeals by the CPO and Line Managers to C-Level supporters. The upshot eventually was success for the lower specification / lower risk / lower cost faction led by the Procurement function.

This outcome only occurred because of the support for the alternative strategy proposed by the MD of the company, who over-ruled his technical middle managers after we had worked with other, and more supportive, technical staff to provide the alternative options that persuaded him of the inferiority of the current sourcing strategy. Once again, building an alliance internally of like-minded individuals technically and commercially was key to success.

Key Learning from the Three Cases

The three cases above show that achieving buy-in and early involvement did not occur just because it is a ‘good’ idea; or that people will easily accept change by persuasion alone.

On the contrary, category management must be seen as a potential ‘wrecking ball’ that is directed at the current internal power structures in an organisation. Given this, there are likely to be ‘winners’ and ‘losers’ from any such new category management strategies in the future.

Given this, category management and strategic sourcing implementations based on Tactical (Price/Cost Down) thinking are inherently unstable. This is because they impose Procurement Functional targets on to the rest of the business, at the same time as also threatening existing internal power structures.

To be successful, it is self-evident that the Procurement Function must be blessed with significant senior management buy-in before the event, and/or a sophisticated understanding of how to build alliances in situations of internal conflict after implementation commences.

We summarise below some of our key learning about how to develop effective category management and strategic sourcing strategies in situations of Tactical (Price/Cost Down) implementations, with inevitable internal conflict:

  • Category management implementations are always a ‘wrecking ball’ directed at the current internal power structures of an organisation.
  • Internal conflict is inevitable requiring a sophisticated understanding of how to devise and deliver complex change management initiatives.
  • If drastic action is required, then you must have the necessary internal analytical power & leverage tools to identify allies and opponents effectively.
  • You must also have the ability to develop successful internal alliances with those whose own goals and KPIs are not yours.
  • You must also have the ability to develop practical strategies to deliver valued outcomes.
  • If you have senior management support, you must not be frightened to use it (and sometimes brutally) if you must.
  • If you lack senior internal support for such radical strategies you must replace these with persuasion.
  • To persuade others demonstration categories must be identified that link potential corporate impact with existing senior management support to enlighten recalcitrant senior managers, who currently do not wish to participate, about the benefits of involvement.
  • Do not select categories that will not support the demonstration programme with stellar results—you only get one stab at this strategy and if you cannot deliver the business will not give you a second chance.
  • When faced with middle managers who have closed minds build internal alliances with other technical staff, and ‘break the log jam’ by demonstrating to senior managers the technical and commercial strengths of alternatives.

While this list summarises some of our key learning about how to successfully implement Tactical (Price/Cost Down) approaches to category management there is another way, but it is not one much understood by Procurement professionals in our experience.

This approach engages with cross-functional partners, so that they buy-in to category management and strategic sourcing through persuasion and synergy, while avoiding rancour and internal conflict as much as possible.

To achieve this, you must possess a methodology to understand Value For Money Trade-Offs (i.e. the relative criticality of cost reduction in relation to other sources of corporate value improvement), as well as competence in Value Flow Management.

How to achieve these strategic value-driven rather than merely tactical price/cost based outcomes is explained in more detail in our next blog (Value Flow Management: Value-Driven Category Management & Strategic Sourcing). This explains how we transformed the three cases briefly outlined here to deliver considerable value for money improvements for the organisations concerned.

The Problem of Cross-Functional Involvement & Buy-In

Image1In a recent blog, 12 Causes of Sub-Optimal Category Management & Strategic Sourcingwe outlined some of the key factors (identified during our benchmarking and consulting exercises) that explain why organisations often do not perform as satisfactorily as they might.

In this first of two inter-linked blogs we focus on what we believe to be the issue that has the most significant impact on all of the 12 causes of sub-optimality. This is the problem of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and especially when it tries to develop an effective organisation-wide approach to category management and strategic sourcing.

In this blog we explain, by use of a number of indicative case studies, why achieving effective cross-functional involvement and buy-in can be so difficult. This blog is followed by another that outlines the IIAPS approach to resolving this dilemma.

Evidence of a Lack of Cross-Functional Involvement & Buy-In

In our experience there is considerable evidence of a lack of cross-functional involvement and buy-in to what the Procurement/Purchasing/SCM function is trying to do, and across all of the organisations we have worked with.

The following four typical case examples of this endemic problem help set the scene:

The ’Close the Door On Your Way Out’ Case

In this case the Head of a major Business unit in a multi-Business Unit company told the newly created CPO seeking to operate a category management strategy that as far as he was concerned the function only added time and cost to his production operations, and to quote the individual concerned:

Problem-Case1web“The best way for you to help me is to close the door on your way out!”

Given the power of this BU Head in this company it is hardly surprising that the CPO was unable to implement a best practice Category Management & Strategic Sourcing approach.

The ‘Snake in the Grass’ Case

In this case the Head of Operations organises a meeting for the CPO and his Category Management & Strategic Sourcing Transformation Team, and with all of the Heads of the Business Units. Everyone agrees that category management is a fantastic idea to help reduce costs, and everyone agrees to support the initiative.

On attempting to organise workshops to discuss how costs can be reduced through better cross-functional engagement the Transformation Team discovers that most (if not all) of the Business Unit Leaders are unwilling to provide the resourcing for their staff to take an effective part in the discussions. The following exchanges are normal:

Problem-Case2web“You can have a junior member of staff for half an hour on the phone to discuss any demand or design and specification issues”.

It is not easy to develop an effective Category Management & Strategic Sourcing process when Business Units leaders are not prepared in practice to provide the resourcing necessary, whatever they may say in meetings with senior managers.

The ‘You Are Just the Hired Help’ Case

In this case a Business Unit agrees to develop category strategies with the Function and agrees to send some of its middle mangers to cross-functional workshops to help identify cost saving opportunities.

During the discussion on one strategy the Procurement team ask the BU team for early sight of their demand planning and forecasting data to enable to them to understand the demand and supply optimisation opportunities that might be feasible in the future.  The BU team flatly refuse to provide the data on the grounds that it is confidential, secret and only for the eyes of those who develop business strategies. When challenged they state badly:

Problem-Case3web“Look, you guys are much lower in the pecking order. You are here to help us buy what we want, against our specs and as cheaply as possible. Nothing more!”

It is quite difficult to develop an effective Category Management & Strategic Sourcing process when middle managers are not prepared to provide the necessary information to allow one to challenge current design and specification or demand management practices.

The ‘Post-Contractual Myopia’ Case

In this case a company agreed that all Business Units would participate in a cross-functional team to develop a category strategy with the Procurement team to identify cost savings opportunities. In the process a new sourcing strategy was jointly developed.

In the past the engineers in all of the Business Units had a preference for one supplier. The new, jointly agreed, strategy provided framework agreements, both for the incumbent single source supplier and also for two major competitors. This was based on the understanding that the other two suppliers would help to drive lower costs, because their pricing was lower than the incumbents. There was an additional potential cost reducing bonus agreed as well, because further volume discounts were negotiated if any of the two new suppliers achieved more than one-third of the volume each year.

While not involved in its development we happened to review this strategy with the company two years after it was initially devised, and to our surprise we discovered that the initial single source supplier was still receiving 100% of the work, with no discernible cost savings of any kind.  When confronted about the lack of work being awarded to the two lower cost suppliers the engineers in the Business Units basically told us:

Problem-Case4web“We award work to the best supplier not to who the Procurement function would like us to, so that they can make their cost reduction targets. We have far more important issues to worry about than their targets and bonuses!”

Obviously, it is not easy to develop an effective Category Management & Strategic Sourcing process when the Procurement function is unable to understand the relative importance of their own targets and goals when set against those of their cross-functional colleagues in the business.

So What Key Conclusions Can We Draw From These Cases?

The reason for providing these short case studies is because they exemplify many of the common issues that organisations have to face when they try to implement category management, and especially when they attempt to develop a cross-functional approach to sourcing strategies.

Each of the four cases also helps to identify the following 5 key conclusions we have drawn about the effective implementation of category management and strategic sourcing:

  1. It is more often internal, rather than external, factors that thwart effective implementation.
  2. Effective analysis and corrective management of current and future internal stakeholder power and leverage positions is critical to success
  3. Mandated cross-functional early involvement (and with appropriate staff time and resourcing) is an essential requirement
  4. Understanding the relative criticality of cost reduction in relation to other sources of corporate value improvement is a prerequisite of being able to communicate and engage with cross-functional partners, so that they buy-in to category management and strategic sourcing
  5. If you do not possess a methodology for understanding Value For Money, or for how to undertake Value Flow Management, it is not possible to implement category management and strategic sourcing successfully

The reasons for arriving at these 5 general conclusions are outlined in much more detail in our next blog (Tactical Solutions to the Lack of Cross-Functional Involvement & Buy-In). This explains how we transformed the four cases outlined here to deliver considerable value for money improvement for the organisations concerned.

12 Causes of Sub-Optimal Category Management & Strategic Sourcing

Evidence from IIAPS Benchmarking & Improvement Methodologies

Most leading organisations have developed a category management and strategic sourcing process, so why do so many of them fail to deliver exceptional value for money outcomes?

Over the last ten years IIAPS benchmarked a large number of organisations using its PSCM Index Methodology.  This approach analyses organisations against 184 attributes of procurement and supply chain management competence. The figure below demonstrates the current performance of organisations by sector when scored against a potential world-class top score of 100%.

PSCM Index Scores by Sector

Few organisations score in the Top Quartile (over 75%), which demonstrates the current lack of overall use of all of the tools that are potentially available to manage procurement and supply chains effectively. Interestingly enough, when we analyse only the use of tools for category management in our database, it is clear that there are significant gaps in across particular steps in the process.

8-Step Process Benchmarking Scores

The figure above demonstrates that organisations score highest for the use of tools in Steps 5 and 6—the market test and negotiation process. They also score reasonably well in Step 3 supply market analysis. The evidence shows, however, that there are significant gaps in performance in the pre-contractual Steps 1, 2 & 4 and post-contractual Steps 7 & 8.

Our view is that it is in these poorest performing Steps that the greatest impact can be made in leveraging improved value for money. So why is performance sub-optimal and so weak in these areas?

IIAPS benchmarking research indicates that there are 12 key causes why sub-optimal performance occurs:

  • Lack of cross-functional buy-in so that all value for money options are never considered
  • Lack of early involvement so that options are closed
  • Insufficient time and resources (people/money) to undertake the necessary analysis of options
  • Excessive fragmentation of spend, with short-term management philosophies dominating organisational sourcing thinking
  • Lack of rigorous and robust current and future spend management data with a lack of segmentation methodology to identify categories of spend
  • Lack of embedded performance management culture using rigorous and robust KPIs for all categories of spend, with focus only on price/cost savings rather than value for money KPIs
  • Endemic maverick spend, with a lack of mandate for Procurement staff to be involved in the whole of the sourcing process pre- and post-contractually
  • Lack of embedded and on-line processes/systems to manage categories of spend, and to undertake sourcing strategy development and/or supplier relationship management
  • Lack of use of sophisticated power and leverage positioning analytical tools to develop sourcing strategies
  • Lack of knowledge management, leading to staff reinventing the wheel
  • Lack of fully competent staff, with a fully rigorous methodology to analyse all value for money trade-off options
  • Failure to fully develop supplier relationship management options in the pre-contractual steps of the process

In our benchmarking experience (as discussed in our World-Class or Best-in-Class? White Paper) these issues recur across all organisations time and again.

We will be writing blogs in the future about each of these 12 key causes of sub-optimal performance. In these blogs my colleagues and I will try to explain IIAPS thinking about how to resolve these issues and improve competence in category management and strategic sourcing.

Are Aggressive Buyers Stupid or Guilty of Segmentation Errors?

200938132350607This blog by Andrew Cox (originally posted on Spend Matters) continues the debate on procurement practices in the retail industry that have come under recent scrutiny and criticism.

In a recent blog (Spend Matters, 21st January) I explained why I disagree with Peter Smith’s view (Spend Matters, 12th January) that food companies should be condemned as ‘unethical’. I also do not think food companies have been ‘stupid’.

Nevertheless, I do agree with him (and with David Atkinson) that, when developing more aggressive sourcing strategies to extract extra value for themselves, these companies—in the face of increased competition and declining profitability—may have been guilty of some serious power and leverage segmentation errors.

It would appear that the some food companies may have rushed into decisions without fully segmenting their power and leverage positions across their entire supply base. By doing so they have appear to have developed a ‘knee-jerk’ and ‘one size fits all’ approach to sourcing.

Perhaps the gravest error that any buyer can make is to fail to properly segment their supply base, so that they can fully identify the range of power and leverage scenarios that exist (see diagram below), both within their categories of spend, and also in relation to each and every supplier within them—currently and potentially in the future.

The Power Matrix Figure

Only by understanding the current and future potential power position of each and every supplier in a category of spend, does it become possible to identify two things:

  • Which categories are likely to be the most amenable to particular types of sourcing strategies?
  • Which suppliers (if not all) within a particular category are likely to be the most amenable to successful leveraging successfully, given a particular sourcing strategy?

To put it at its simplest, if a supplier is dominant (i.e. they have a monopoly over a product/service which cannot be easily competed away, and this is highly valued by the buying company’s customers) then it is likely to be a serious error to try to leverage them aggressively within a contractual term, or before awarding a new contract. If the dominant supplier has many alternative options they can either walk away or impose unacceptably high costs on the buyer for their aggressive behaviour.

Conversely, if a supplier is operating in the buyer dominance (few buyers/many suppliers/low switching costs) or independence power positions (many buyers/many suppliers/low switching costs) then the scope to use more aggressive leverage successfully within or before contracts are signed is much greater for the buyer. This is because the buyer has many alternative sources of supply and the supplier must continue to pass value to the buyer if they wish to retain the relationship in the future.

It follows from this that buyers must be extremely careful about analysing the power position of each and every potential supplier, both now and in the future. If they do not, then they may well fall into the trap of adopting a ‘one size fits all’ strategy that can lead to serious supply consequences in the future.

In this light, although we cannot know for certain without analysing these sourcing strategies in detail, the adoption of universal approaches that demand more money for simply being a supplier (Premier Foods’ pay and stay approach), or continually asking for increased discounts after agreeing contractual prices (Tesco), are evidence of overly-simplistic sourcing approaches that have not been informed by a sophisticated segmentation of the power and leverage positions of each and every supplier.

That said there is nothing wrong with adopting a universal approach to supplier leverage in the future, but this is only likely to be safe if the power position favours the buyer both now and in the future, and all of the suppliers are operating in a relatively weak bargaining position (which of course never happens).

Given this, it could be that Sainsbury’s strategy of delaying payment terms for all of its construction and fit out contractors is a sensible strategy. But this would only be the case if all of these suppliers are highly dependent on working with Sainsbury’s, with few alternatives, and none are able to use counter leverage in the future.

It is not clear, however, whether or not food companies have fully thought through this last point—namely, the need to fully understand and segment the time dimension in power and leverage.

Obviously, while power can move between buyers and suppliers over time, it is important to recognise that this power shift does not occur in all categories of spend in the same way. Sometimes, buyers may be at risk of it, but at other times they may not. One must be careful, therefore, about claiming that suppliers will always be able to take advantage of buyers in the future if they abuse their power now, and vice versa.

Once again this forces us to recognise that a ‘one size fits all’ strategy is normally an error, and that the sophisticated segmentation of power and leverage scenarios is at the heart of successful sourcing strategy development and subsequent supplier relationship management.

Indeed, it is interesting to conclude with the thought that power segmentation within supply chains also demonstrates that the use of aggressive ‘within-contract’ (this is post-contract if deemed after contract award) and ‘post-contract’ leverage may be much easier for some companies than others.

There is another power-related factor—sourcing strategy brand impact—that buyers have to consider, and one which may be much more problematic for B2C retail companies that sell to end consumers (like Tesco and Sainsbury’s) than for B2B companies (like Premier Foods and 2 Sisters) selling to retailers. Arguably, B2C firms have to be much more aware of the impact of their sourcing strategies on public opinion and customer behaviour than others (and particularly if these are likely to be aired in the press and media).

The problem for Tesco and Sainsbury’s is that their brand reputation is a key factor in their overall business strategy, and this is because they operate in an increasingly competitive market, with new lower cost entrants challenging their historic market shares and profitability. In such a market, where the switching costs for consumers are relatively low, food retailers must jealously protect their brands.

This means that any consumer perception that a sourcing strategy is a form of ‘unethical bullying’ is likely to have a significant impact on customer behaviour, and potentially on market share and profitability. Arguably, this issue is much less likely to be a constraint for B2B companies (and especially multi-product) companies in the food supply chain.

While we have only focused here on a few power resources (and there are many more that need to be considered when developing an effective sourcing strategy), these examples highlight the fact that some food companies are evidently not fully competent in understanding power and leverage when developing their sourcing strategies.

This reinforces the view that one of the greatest weaknesses in the procurement profession today is the lack of competence by buyers in fully analysing their current and future power positions, leading to a failure to fully understand the appropriate sourcing options that are available to them to leverage improved value from suppliers.

How this competence gap can be eradicated will be a subject for the future.

10 Reasons Why Organisations Make Mistakes When Outsourcing

outsourcingAThe list of major outsourcing failures is extensive and demonstrates that many organisations are guilty of developing and implementing sub-optimal make-buy strategies.

The following provides 3 case examples where outsourcing has led to significant commercial and operational problems.

The NHS’ NPfIT project has seen estimated overruns of £7.6bn, inherent security problems, medical staff unhappy with proposals, and deadlines going out of the window. EDS, Fujitsu, CSC and Capital Care Alliance are amongst the names taking the blame.

Cable & Wireless outsourced global IT services to IBM. 14 months later a benchmarking process revealed an overcharge of £115m for UK operations alone. The dispute between C&W and Big Blue went all the way up to the High Court before being settled in an ‘amicable resolution’, but this meant that C&W could not insource again until after the agreement had expired.

The UK’s Department of Work and Pensions outsourced its IT to Microsoft and EDS. A worker decided to upgrade his desktop to Windows XP, but accidentally applied the changes to the entire network of 80,000 computers which all crashed. This is widely regarded as the worst computer crash in UK government history.

This short blog highlights the following 10 common reasons why organisations appear to make such mistakes when outsourcing:

  1. A lack of a robust and rigorous make-buy methodology that is consistently used by all staff throughout an organisation, with individual managers developing their own idiosyncratic approaches.
  2. A failure by managers at all levels within organisations to be trained in the basic principles of commercial exchange.
  3. A failure to understand pre- and post-contractual power and leverage, and its relationship to moral hazard and lock-in.
  4. Short-term decision-making that is focused primarily on financial headcount reductions and/or operational cost reduction, without consideration for the long-term strategic and operational consequences of this.
  5. A lack of cross-functional participation by all relevant managers and functions within the organisation.
  6. Decisions being made to protect or defend standard operating procedures and historic “turf” boundaries unrelated to a strategic or tactical understanding of value add in the business.
  7. A lack of iterative review of past outsourcing decisions, with a view to a flexible approach to re-insourcing or re-outsourcing past decisions.
  8. A failure to monitor market and supply chain circumstances externally once outsourcing has been undertaken.
  9. A failure to create proactive sourcing mechanisms to drive continuous performance improvement by the supplier once outsourced contracts have been awarded.
  10. A failure to create a robust exit strategy before entering into any outsourcing relationship.

Many companies think about make-buy issues infrequently and this leads managers to devise their make-buy (insource-outsource) methodologies on the spur of the moment. These are normally informed by a common-sense understanding of the key issues, but often without a proper understanding of the keys questions that must be asked about post-contractual moral hazard and lock-in.

Indeed, in over 30 years of working with public and private sector organisations it is very unusual to find those that have a rigorous and robust make-buy methodology that it is taught to all aspiring senior and middle managers in the business.

Many current make-buy decisions appear to be made in order to massage quarterly or annual returns by finding short-term cost reduction opportunities, without any real understanding of the medium to long-term post-contractual risks being entered into.

This is compounded by the fact that the decisions are often made by senior managers, who lack a basic understanding of the principles of commercial exchange, and who have decided what the answer is before the review is undertaken.

Such managers often decide to exclude from the decision-making process those with the necessary commercial knowledge, who are often the very managers who will be operationally responsible for managing any subsequently outsourced business relationships.