Why are there a disproportionate number of grouches in procurement?
I am talking about people who have been in procurement roles for decades and are thoroughly cynical and grouchy. If you work in procurement, I bet you have one in your mind as you read this. Or maybe you (like me) are prone to bouts of grouchiness yourself!
In my experience these people are often extremely good at their jobs. They will often have hundreds of successful sourcing projects and negotiations under their belts. When tough assignments come up, they are the ones the business stakeholders ask for. These are the old guard; thorough and diligent, no-nonsense negotiators.
So what makes them so grouchy?
I have a theory… The way procurement departments are typically measured, with an obsessive focus on hard P&L cost savings, destroys the moral of those who work within these organisations.
Procurement people see potential value in every nook and cranny of a deal; from mitigating risk in a limitation of liability clause, to better defining the deliverables so that the supplier does not cut corners. But more often than not, none of this is measured. In most procurement organisations, the only thing that matters is the reduction of costs compared to those same costs in the previous year. For new purchases there is no baseline to measure against, therefore, no saving.
“What gets measured gets managed” – Peter Drucker.
If we are incentivised by hard P&L savings alone, then buying stuff at the highest possible price in year one, so that there is plenty of scope to reduce that cost in years two and three then becomes a logical strategy for a procurement department. Even if such a strategy is not explicitly pursued, it does become a subconscious thought pattern for the negotiators doing the deals.
Measuring Only P&L Savings Results in Bad Deals
Nowhere is this more damaging than in software purchasing. Once you have bought into a software product, nine times out of ten you are stuck with it. Or at least there will be a significant cost of change to move to an alternative. Not only that, but, with perpetual licensing, your licence acquisition costs will determine the cost of maintenance and support for as long as you use those licences. It is crucial to put all your effort into getting a good deal on a new software purchase.
Furthermore, getting the terms and conditions of a software licensing agreement right is paramount for compliance with the licence grant and for avoiding escalating costs in the future. Typically, effort spent on mitigating these risks is not measured, and, therefore, goes unnoticed.
I am on a bit of a rant here. As you can see, I can also succumb to outbreaks of grouchiness 🙂
So what is the solution to this?
Organisations are always going to look to procurement to reduce costs. However, if procurement departments really want to take a seat at the top table, they need to measure and demonstrate the other value us procurement folks bring to the table. Here are five specific to software purchasing that I recommend measuring:
- cost avoidance on new software purchases;
- value derived from bringing innovative software suppliers to the business;
- contracts with minimum deviations from preferred terms;
- designing the most appropriate commercial models for deals; and
- results produced through effective supplier management (not just a “tick-in-the-box” supplier review).
A major reason that many organisations struggle with software procurement is because they do not treat it with the importance it deserves. Software licences are not widgets made in China and bought by having the suppliers participate in a reverse auction. When you are buying software, you are dealing with intellectual property rights and complex licensing models. Overly simplistic, cost-based metrics are not going to drive the right behaviour from your procurement team if you want them to craft the kind of software deals your business needs.
Measuring the five things above is entirely possible and can transform how software is purchased.
The rosy world resulting from broader, “value-based” measurements would be one where the grouches would have nothing to grouch about, and procurement departments would bask in the compliments of business stakeholders who would appreciate their value. “Dream on”, I hear you say! Well I am allowed to dream aren’t I?
Image credit: “Oscar The Grouch” by whatleydude, creative commons, Flickr.com