Mike Buchanan, author of Profitable Buying Strategies (as well as Two Men in a Car, Guitar Gods in Bed, and The Marriage Delusion), agreed to participate in a Q&A session with Buyers Meeting Point about his book. Profitable Buying Strategies is an excellent resource for any procurement professional. Those new to the discipline will benefit from a clear outline of key concepts, strategies, and tactics. More experienced buyers will appreciate the case studies and a thorough review of how to take their current approach to the next level.
All readers, regardless of their perspective, will enjoy Mike’s casual, lively writing style. His depth of experience and sense of humor combine to make this particular procurement book a much more entertaining read than you might expect.
BMP: In your "10 Keys to Cost Reduction" you mention that relative to the other keys, negotiation is not necessarily an important approach to reducing cost. Why do you think so many procurement organizations act to the contrary, putting a strong emphasis on developing the negotiation skills of their team members over market testing or organizational skills, for instance?
MB: I believe there are three main reasons:
1. Many people are drawn to procurement, and remain within it, because they enjoy the power they can exercise on a daily basis over vendors’ executives. Not in many walks of life can people exercise such power until they are well advanced in their careers, and if they try to exercise that type of power with their partners at home – and some do – the results are not happy. It is not often that the buyer (at least in those markets in which he has a considerable spend) will find himself the weaker party in a negotiation, other than through incompetence or misfortune (eg he has left it too late to market test properly, so effectively has to negotiate a fresh contract with an incumbent vendor). In negotiation workshops I run with an associate, we have buyers doing role-playing exercises alternately as buyers and sellers. They are almost always more stressed when in the role of the seller who HAS to win the contract. And they go away from the day with a much higher opinion of sellers!
2. Let’s be honest. It’s much easier to have a negotiation with a vendor and be able to tell the boss that you’ve reduced the price of the new contract from $5.0m to $4.5m through an hour’s negotiation with the incumbent vendor, than spend a longer period on thorough market testing, which is much harder work, and using a wide range of the ‘keys to cost reduction’ to take on a new vendor who will supply at $4.0 million.
3. There’s a well-established and large market for negotiation training, and it would be a poor course indeed that did not deliver a high ROI. But my experience tells me that over time buyers develop a negotiating style in line with their basic nature. So aggressive people will negotiate aggressively, while co-operative people will actively seek ‘win-win’ outcomes. This is why SmithKlline Beecham in the early-to-mid 1990s made the smart move to aligning buyers’ individual natures with the quadrants of the purchasing portfolio. So the aggressive buyer could happily beat up corrugated case vendors year after year, while the ‘win-win’ buyer could negotiate the worldwide advertising contract. Each would be hopeless in the other’s position.
BMP: In your chapter on Effective Tools and Techniques, you discuss the importance of securing the commitment of Senior Management when putting a strategic buying cycle in place. How should procurement organizations ensure they have direct access to the right level of their organization and what specific expectations should they have of upper management?
MB: This question has been the focus of interest to the profession for the 25 years I’ve been in it, and probably before. Top management interest in procurement / cost management will naturally reflect the proportion of the company’s revenues that are spent with vendors. If you’re in a service company where it’s 20% and the markets you source from are stable – so forward cost predictability is high – you shouldn’t expect much interest. If you’re in the fiercely competitive auto sector and it’s 80%, you can be assured of deep interest. Most procurement professionals are in the difficult ‘middle ground’. Frankly I’m bored to death by the pleas for higher recognition that the profession – and especially the profession’s professional bodies – have been making even before my time in the profession (my first senior procurement job was in 1984). People forget that EVERY profession whines endlessly about the need for greater recognition. IT and HR come to mind. Top executives see the pleas as self-serving, and they’re usually right to do so.
BMP: What advice would you give buyers relative to preparing for a negotiation session with suppliers? Specifically, what preparation is required to maximize your "Five Golden Rules of Negotiation" (listed below) and vendor pre-conditioning as outlined in the chapter on Negotiation?
The Five Golden Rules of Negotiation
MB: Assuming the buying cycle has gone to plan, you should be in the happy position of having a number of offers from viable vendors. You should then set a ‘maximum settling point’– AND STICK TO IT. I do this in my personal life too when I’m selling something of value. I’m replacing my seven-year-old Mercedes and given market intelligence I’m seeking (as I’m the seller not the buyer) a minimum of £8,300. The offer on eBay says £8,500 and invites offers. Two people have offered £8,100 and I’ve declined. It would have been too easy to say ‘yes’. Sometime over the coming week I’ll get £8,300. It will be the easiest extra £200 I’ve earned this month.
BMP: In the following quote from the book, you caution buyers against accepting offers made outside of the negotiation timeline: "For the sake of your reputation, and future credibility with vendors, you should always reject offers made after a clearly communicated deadline". Can you offer suggestions to buyers who want to adhere to this ethic but face challenges from colleagues/managers who want to accept the 'rogue' offer?
MB: Very difficult issue. I assume you are talking of a situation where the organization is not giving you the authority to take a firm line and reject the challenges of colleagues/managers? I’d explicitly seek that authority, explaining why the principle is important, and if you lose the point, consider resigning AFTER you get an alternative job offer. I did that once and walked taller as a result. One of the best decisions I ever made. You may or may not choose to inform your boss of your intention. I’ve known people to give up lucrative jobs and not find alternative employment for a lengthy period, so this is very much a matter for the individual to decide in the light of the circumstances.
BMP: You recommend sharing desired contract terms with suppliers at the time that pricing information is solicited. What would you advise in cases where the terms (particularly contract length) will depend upon the pricing received - either because the category has not been sourced before or because the market is unpredictable/not well known by the purchasing company?
MB: Many buyers commit to a vendor under such circumstances, not knowing that an even more capable vendor could offer far better terms. There are a number of things you can do. You could seek differential pricing for different contract durations. My advice would be - assuming you’re under pressure to agree a contract, and don’t have time to do a proper market exercise – keep the contract duration as short as possible consistent with the time likely to be required to carry out that exercise. Give the vendor the impression that if his pricing turns out to be highly competitive he can expect to be treated favorably on contract renewal, but if it turns out to be uncompetitive he can expect to not even be among the potential vendors on contract renewal. (Early in the market testing exercise try to get some feel for likely pricing levels from a ‘co-operative vendor’. They’ll probably 5-10% to their real minimum settling prices.)
BMP: Given the importance of producing savings reports that the rest of the organization trusts, do you feel that procurement can track and report on their own results or should this be the result of a collaborative effort with finance so that a degree of auditing is built into the reporting process?
MB: Ideally a mechanism can be agreed for finance alone to produce the numbers, with procurement possibly adding some comment if necessary. Easier in manufacturing than service sectors, if you have ‘standard costs’. I have rarely known savings figures produced by procurement alone to be trusted at a senior level.
BMP: Do you have any recommendations for procurement organizations relative to the emphasis that should be placed on formal certification programs and continuing education for their sourcing and buying professionals? What is your advice for recruiting and retaining good procurement talent and how would you describe the profile of a 'best in class' procurement professional?
MB: Recruiting and retaining talent is a matter of offering a competitive package and offering a wide variety of challenges to stop the ‘talent’ from getting bored. And the more talented people are likely to want to work both in other companies in their sector, and in other sectors. I think the best procurement people are those who have number of sectors (ideally at least three, and in both the manufacturing and service sectors) AND spent some years with a good (not necessarily ‘household name’) consultancy.
MB: I’d like to conclude by sharing a personal anecdote. About 20 years ago I was Gillette’s UK Head of Procurement, based in London. Even back then many job adverts were seeking people with ‘excellent interpersonal skills’. I estimate than now 90%+ of adverts ask for this, when maybe 5% of people have them. Anyway, I asked the job applicant – who was seeking a role as a Senior Buyer – if he considered he had excellent interpersonal skills. He said, “No, they’re terrible, which is why I was advised to go into Procurement rather than into Marketing, where I wanted to go. But I found I had an aptitude for buying, I like buying, and I’m damned good at it.” I took him on and he WAS damned good at it. I never met anyone before or since so oblivious to vendor conditioning (while people with strong interpersonal skills tend to be hopelessly open to conditioning…)
From the book’s flap: Mike Buchanan [author of Profitable Buying Strategies as well as several works of fiction] is the Chief Executive of LPS, a well-known procurement consultancy in the United Kingdom. Mike began his procurement career with Beecham, and in 1984, at the age of 27, he was appointed Chief Buyer of a major division of the company, with an annual budget of £40 million (the equivalent of £90 million today). He later held senior procurement roles at Gillette, Revlon, and Exel Logistics, and was responsible for buying a wide range of goods and services.
In 1999 he founded LPS, and he has since led cost reduction programs in major organizations in a number of sectors including services, manufacturing, professional services, retail and politics.
For further information about LPS, please go to www.lpsconsulting.co.uk.