The Contract as Catalyst for Cultural Change in Procurement
Scenario 1: The supplier contacts you in writing to state they have submitted the wrong pricing in the bid…what is your first response?
- Tough luck you submitted it
- That’s typical of suppliers, always trying to trick you
- Expect the price is going to increase
- Interested to see if they are submitting a lower price
Scenario 2: The supplier approaches you and states they think they have a solution to deliver the contract more efficiently...what is your first feeling?
- They are looking to upsell
- I don’t believe them
- They are trying to make me look bad
- Want to discuss in a supportive and engaging manner
Scenario 3: The business reduces its requirements 2% in the contract and understandably do not want to pay for what is not required. Do you;
- Tell the supplier to “suck it up” and not re-negotiate the contract
- Re-negotiate the contract to ensure they are fairly compensated
Unfortunately we all know the responses because it is an attitude that is the default towards suppliers; confrontation & mistrust. For many within procurement it is a justified attitude because in the past any leniency has been abused by suppliers.
I recently had an opportunity to talk to a CPO who had just retired after 40 years from a global technology company, well known to you all and a leader in their field. When we discussed Collaboration it was frowned upon as not a real business practice. As far as they were concerned it was "the obligation of every CPO to re-negotiate contracts regardless what had been agreed" and went on to state how “they were proud to aggressively negotiate every contract"
The 21st century is not the same as the 20th century, markets are more volatile and dynamic than ever before, which is being interpreted as risk and impacting bottom Line profits. Technology is creating new opportunities and Economic climates are challenging many markets, because the world is "getting smaller" Culture both in business and across mankind is changing too. Natural resources are reducing, skilled resource is at its prime, the pressure to address environmental sustainability is increasing and coupled with increased competition, 21st century markets are not the same as the 20th century so why is the culture “stuck in the past?”
To address the new markets businesses are calling for greater collaboration with their supply chain and how is Procurement responding? Ultimately procurement is an ambassador of the business, how it engages with the supply chain reflects how the supply chain responds.
Collaboration is a small word with significant impact:
- Why would a supplier notify you they could create contract savings when your attitude might be “it’s the suppliers obligation to do it and we keep all the savings”
- Why should a supplier trust procurement when they will still demand a contract re-negotiation, just to hit their savings targets
- Why should a supplier trust procurement when a reduction in contract value might result in “suck it up”
- How can a business relationship be established on aggression
It is difficult to ask Procurement to change culture when it has developed over time, yet with the right control and incentive I believe it is possible.
For many people the contract is just a legal document to manage performance and supplier failure but in the 21st century it needs to be much more, it needs to be the catalyst for cultural change.
The contracting models we use within B2B engagements were designed for the 20th century, hindering the cultural change needed for the 21st century.
To change culture we need contracts that:
- Encourage and rewards collaboration, for mutual financial benefit
- Ensure suppliers are always compensated for reductions in buyer requirements, whilst increasing business savings
- Are scalable and practical
- Without increasing risk or costs to either party
- Whilst reducing workloads to both buyer and supplier
- Creating not just financial, but political, environmental and social benefit
- Enable organisations to embrace the new market, to increase bottom line profits
- Can be use in public and private sector contracts and internationally
Sounds a bit farfetched doesn’t it?
Culture can be a significant part of an organisations success, just because it might have been a “justified” attitude in the past does not mean it is the approach for the future.
We have the capability to change, do you have the desire?