Category Archives: IIAPS White Papers

The Problem With Win-Win

WP-ProbWinWinWhy the notion of ‘win-win’ in collaborative long-term buyer-supplier relationships is as misguided as it overused.

Creating mutually advantageous “win-win” outcomes is frequently considered best practice, just as partnering was a decade ago. As a result, like partnering, the win-win concept suffers from the same type of use and abuse that is likely to render it a meaningless concept.

An IIAPS White Paper challenges the view that win-win outcomes are best practice and contends that buyers seeking to achieve such outcomes are guilty of poor and misguided thinking. This is because a true win-win, in which both parties simultaneously achieve their ideal outcomes, is not feasible under any circumstances.

By its very nature, buyer and supplier exchange is always contested. Despite this, it is argued that long-term collaborative relationships are still an extremely useful tool in the armoury of a buyer seeking improved value for money.

The White Paper provides four cases which demonstrate that collaborative relationships can be highly successful for competent buyers, but a recipe for disaster for the unwary.

To some the cases may appear to be examples of win-win outcomes, but detailed analysis of these long-term collaborative relationships reveals that is not the case in practice, and that very different outcomes occur, some of which favour the buyer and some that definitely do not.

The search for a win-win is a fundamental error that can blind managers to the reality of the buyer and supplier exchange. The paper concludes by providing five steps to avoid myopia in collaborative relationships and the problems that buyers may face if they end up being taken advantage of by more commercially competent suppliers, who are maximising their own commercial and operational interests at the expense of the buyer.

All of the arguments presented in this blog are fully explained in the IIAPS Whitepaper The Problem with Win-Win.

The Causes of Major Outsourcing Failures

Outsourcing. Business Background.Many organisations are guilty of sub-optimal strategies because they do not understand the potential pitfalls of outsourcing.

Managers are faced with an avalanche of advice about what they should do to be successful. The academic and consulting management literature is replete with articles and books that provide guides to success, with many case studies explaining why a particular individual or company was successful and what practitioners must do to emulate it in their own organisations.

This is not surprising, because practitioners are keen to find shortcuts and are desperate to emulate those who have been successful. Outsourcing is no different, as it has become something of a dominant approach as organisations seek ways of improving competitive advantage and bottom-line performance.

There are, however, problems with this approach.

  1. Practitioners copying what others have done can be dangerous if the emulator is not operating in exactly the same circumstances as the originator.
  2. A little knowledge can be dangerous. A cursory perusal may allow an emulator to understand in general what the originator did, but not fully to appreciate what was required to put it into practice successfully.

Given that emulators often fail to achieve the same success as originators, it is somewhat surprising that managers do not spend more time trying to understand why. Even more so because, from an early age, human beings do not normally learn by being told what is the correct thing to do. In fact, most of us learn from experience – that is, from making mistakes.

Most of the outsourcing decisions that IIAPS staff have analysed over the last two decades have been failures rather than successes.

By understanding what goes wrong strategically and tactically in outsourcing decisions, practitioners will be in a much better position to understand how to be successful. This is a radically different approach to the normal advice that practitioners receive.

An IIAPS White Paper highlights the major outsourcing failures that we have identified:
Pre-Contractual
1. Outsourcing strategically critical assets
2. Retaining tactically non-critical assets in-house
Post-Contractual
3. Failing to understand post-contractual “moral hazard” and lock-in
4. Inappropriate post-contractual relationship management

Each of these generic problems is outlined, with case studies to provide empirical evidence of the errors that organisations make on a fairly regular basis.

The Whitepaper also provides the 10 major reasons why organisations appear to make these mistakes when outsourcing and the 5 steps to successful outsourcing.

What is clear in practice is that, despite the many thousands of words written on the subject of outsourcing, most organisations we have worked with appear to be guilty of sub-optimal strategies. This is because practitioners do not fully understand the pitfalls of outsourcing.

Effective Buying – The Hidden Costs of Purchasing

WP-EffBuyBuyers are under pressure to cut purchase price – but aggressive cost-reduction exercises can sometimes lead to sub-optimal buying. Effective buying requires the ability to manage complex, value-for-money trade-offs and to understand the direct and indirect costs and consequences of ownership.

Interest in effective buying has a long history. The Latin phrase: “Caveat Emptor” means “Buyer Beware!” It was used in Roman times to warn buyers to be wary over what suppliers offer.

In more recent times in his classic quote from 1865, John Ruskin warned buyers about the adulteration of goods and services by unscrupulous suppliers: “There is hardly anything in this world that some men cannot sell a little more cheaply and make a little worse. Those who consider price only are this man’s lawful prey.”

What each of these sayings is trying to explain is that, just because everyone regularly buys things, it does not mean that we are all effective buyers. This is because effective buying involves an understanding of fairly complex value-for-money trade-offs and the avoidance of unforeseen, or hidden costs or consequences over time.

An IIAPS White Paper explains how buyers may begin to think about value for money trade-offs between the specific performance (functionality) they receive from a product or service and the total cost of ownership of acquiring it. This is supported by a number of case examples of effective buying.

The White Paper also introduces a structure for effective buying.  This states that the challenge for practitioners is to understand the organisational processes that support sourcing best practice, and then to convince senior management of the need to resource the process effectively.

There are a number of ways in which a sourcing process can be created so that all aspects of buying can be undertaken in a rigorous and robust manner. In general terms any process must accommodate eight steps – from the initial design and specification of the requirement to its eventual market testing with suppliers, through negotiation and contract award to supplier post-contractual performance management and eventually to strategy review and knowledge management.

All of the arguments presented in this blog are fully explained in the IIAPS Whitepaper Effective Buying: The hidden costs of purchasing.

When are World-Class Sourcing Practices More Important?

A previous blog highlighted the need to differentiate between world-class and best-in-class sourcing practices.

Our extensive benchmarking studies, using our PSCM Index, have allowed us to arrive at an understanding of why certain organisations in particular sectors tend to be seen as exemplar cases of good practice.

It is a combination of a number of factors. Organisations that achieve scores close to ‘world-class’ performance tend to operate in process-based industrial sectors, where high volume and frequent demand allows the adoption of leading edge demand and supply management practices. They also tend to be organisations that are heavily outsourced and make relatively low returns.

World-Class Sectors Chart

In quadrant A in the figure above, adopting ‘world-class’ PSCM processes & systems is unlikely to be seen by senior managers as of much value. Complex PSCM tools and techniques are not high on the agenda, as profits are normally high and the need to reduce costs is low.

This contrasts sharply with the situation in quadrant D where profit margins tend to be low, and most of what is provided to customers is sourced from external suppliers. In these organisations the role of PSCM is critical to corporate success and it is hardly surprising, therefore, that most of the organisations that tend towards ‘world-class’ are to be found here. The Automotive, Retail & Consumer Goods/FMCG sectors tend towards ‘world-class’ performance in procurement because they must leverage external resources for competitive advantage and as a matter of survival, not just because they are better managed than others.

Our benchmarking studies show, therefore, that not every organisation can, or needs to, adopt the same practices as others. Given this, while it is sensible to know where an organisation stands in relation to current ‘world-class’ best practice (the ideal), managers need to understand which practices are ‘best-in-class’ and feasible and appropriate within the sectors in which they operate.

All of the arguments presented in this blog are fully explained in the IIAPS Whitepaper Beyond Kraljic.

World-Class or Best-in-Class?

WP-WCorBICFor benchmarking to be meaningful, you need to be clear about both the performance level you are aiming for and what is feasible in your sector.

Most senior procurement executives want to know how their organisation compares to others in their possession and use of the available operational processes and systems that support ‘good practice’. While this sounds straightforward, understanding what is ‘good practice’ for a specific organisation can be problematic. This is because managers often struggle with definitions of ‘world-class’ and ‘best-in-class’ performance. Are they the same?

An attempt is made in an IIAPS Whitepaper to shed light on these issues.

The general thrust of the argument in this document is that the concept of ‘world-class’ can only be useful if it is seen as a moving ‘ideal’ that is unlikely to be fully achieved by any organisation, but against which public and private sector organisations (operating within particular circumstances) can compare themselves.

This definition makes it possible to understand what ‘best-in-class’ means — the current performance of an organisation relative to both ‘world-class’ and other comparable organisations. This comparison may be against organisations in the same industrial sector, or those of similar size in terms of revenues or number of employees.

The argument is supported by evidence from benchmarking studies into organisational competence in Europe, the Middle East and the US. The evidence shows that some organisations and sectors perform better than others, but also why it is that they should be expected to do so.

Not every organisation can, or needs to, adopt the same practices as others. What organisations and their managers have to understand is which practices are ‘best-in-class’ (i.e. ‘optimal’) for them in the context in which they find themselves. Put simply, organisations need to understand what is the most appropriate thing to do in the context of their sector, market and supply chain
circumstances.

The arguments presented in this blog are fully explained by an IIAPS Whitepaper World-Class or Best-in-Class?