Breaking out of the Procurement bubble

Posted by Pete Loughlin in Procurement Best Practices, Procurement Process 19 Dec 2016

Everyone sits at the centre of their own little bubble. The department we work in is, if not the most important, certainly a linchpin or at the very minimum a crucial cog in the works. At least, that’s how it seems from inside the bubble.

From outside the bubble, it’s a different story. It is very common for people to view those working in separate departments or functions with disdain – they look down on people who play different roles and fail to value the contribution they make. Sometimes, this is simply an ugly, ignorant form of behaviour but it can lead to some very damaging corporate culture. If we use Procurement as an example, that damaging culture can manifest itself as wasted money, threats to reputation and even corruption and corporate fraud.

Procurement is often undervalued, seen by some as either a necessary evil or worse, a distraction to real business. Think of the architect and the engineer that are designing a large bridge. They are the experts and they know what grade of concrete to use, the type of steel for reinforcement and they know their industry well enough to be able to source these things. As a driver of a car that relies on bridges remaining upright, I’m reassured that we do have experts designing our bridges. And I have sympathy for the experts who often don’t welcome what they see as interference from procurement wanting to tell them which suppliers to use and how to save money buying alternative materials. Show me a bridge built by an engineer and I’ll drive over it. Show me one built by someone with a CIPS qualification and I’ll take the long way round.

Or take another example of the surgeon who uses highly sophisticated specialist tools and techniques to cure people of life threatening conditions. If I am about to go under the knife, I’d like my surgeon to have whatever tools she felt she needed. The last thing I want is for her to find she’s unfamiliar with the kit she’s given because a team of procurement people have standardised and rationalised medical suppliers in order to save money.

And one final example – the senior director of a defence contractor who needs specialist consultancy support to operate in a new market overseas. Having been in the armed forces and the aerospace and defence industry for 30 years, he knows who to call upon for expert advice and in such a sensitive industry, he needs to call on someone he can trust. What contribution could Procurement possible make in the selection of a consultant in those circumstances?

These views are commonly held and I’m quoting real examples to illustrate the point. Procurement people are not the experts. Whatever the category of spend, marketing, legal, medical devices, building materials – the experts need to have the freedom to select suppliers and agree terms. Procurement might be able to support the contractual stuff – but that comes at the end – after decisions are made.

To people outside of the procurement bubble, this may all seem like common sense. Indeed, I’ve heard many times professional and intelligent people express these views but consider what happens from a business perspective when these attitudes are allowed to thrive. Let’s not look generically at what could go wrong, let’s use the three real life examples above and examine the real life consequences, in other words, what really happened.

Firstly, the bridge. I tell this story often and it’s absolutely true. On completion of the bridge the accountants examined the budget of the project and they struggled to reconcile the actual costs compared to the planned costs. It seemed that three times as much concrete was bought compared to the concrete used to build the bridge. What happened to the rest of the concrete? They could have built three bridges with the amount they bought. Actually, what had happened was that the concrete supplier was consistently delivering concrete, obtaining confirmation of delivery but then taking the concrete away again only to deliver it again and again. There was collusion between the supplier and the site staff signing delivery notes. Each lorry load was being receipted three times and invoiced three times. Accounts payable couldn’t have known what was happening. The contract with the supplier had not been buttoned down tightly enough and they were allowed to deliver an unlimited amount of material. The P2P process was broken deliberately by unscrupulous staff. It is all well and good that the architect and the engineer got their choice of supplier. In their bubble, they don’t have to deal with the consequences of the massive overspend – at least not until the business goes bust. Procurement, Finance and IT could have supported this contract to make it commercially safer by ensuring that the contract was fit for purpose and that proper receipting process were in place.

The second example of the surgeon is very well known and perhaps the most sensitive. Across the health industry, a lack of standardisation leads to inflated costs but when lives are at stake, the expertise of doctors and surgeons take priority over the commercial considerations. No one would disagree with this however, as a natural consequence of this somewhat emotive thinking, procurement is often relegated to the back office. This can be very costly.

So how can Procurement make a difference in this situation? Gary Welch is the Procurement Director of a large hospital in Oxford, England and in the summer of 2016 he presented a great example of how the procurement function in health can deliver huge savings by standardisation and rationalisation. By collaborating with other hospitals and pooling buying power, he and his colleagues were able to make an instant saving of over £half million.

“We think that if a product is good enough for one hospital, then it is good enough for all hospitals” explains Gary. “The Shelford Procurement Group recently carried out some research into two of the most-commonly-purchased needle products and held a 40-minute e-auction to see if it could drive down the cost. In under an hour, the group shaved £600,000 off the total bill for procuring these devices over all 10 hospitals. This shows that acting together and talking volume can make huge savings,” said Welch.*

This is to be applauded but let’s turn the saving on its head and look at this another way. Gary revealed a saving of £600,000 for one isolated category. We could say instead that he actually revealed a waste of £600,000 as a direct result of allowing diverse selection of basic medical equipment based on local preferences. £600,000 represents a couple of hundred knee replacement operations. Is it not fair to ask the clinicians who promote their freedom to choose non-standard products for very basic medical supplies whether that freedom is more valuable than 200 people’s knees?

Thirdly and lastly, the aerospace and defence (A&D) business. For obvious reasons I can’t go into the details of this true story but this could have been a disaster in so many ways. In a nutshell, a senior director appointed a consultancy firm based on a personal relationship. Men who had served in the same regiment trust each other. That’s understandable and at first glance, it’s not a crazy decision to appoint an expert with whom you’ve served on the front line. But it turned out, that that old regimental comrade was working for a firm of consultants who also had clients known to be terrorists. When the A&D firm’s main customer, the British Ministry of Defence, became aware of this, the consequences could have been dire. The situation was managed diplomatically and the consultancy contract terminated with immediate effect but that might not have been the case. Failure to perform due diligence on this consultant – indeed failure to be seen to perform even rudimentary investigations – was inexcusable. The Ministry would have been within their rights to question the entire relationship with this A&D firm. If it had, they would be out of business.

Bypassing basic procurement procedures can lead to enormous reputational damage. In this case, use of the old boy network could have brought a large business down if the newspapers had got to the story before the government and while no harm was done (and neither, I have to say, was there any intent to do harm) it highlights to all that proper objective checks always need to be in place when making such procurement decisions.

These are three real examples of what can go wrong when Procurement’s influence is weak. While they make interesting anecdotes, there’s something that these tales all have in common which is quite disturbing.

Let me share a fourth example, this time, much less innocent the the three previous examples. This time the CFO of a very large global business makes a decision to establish a shared service centre and outsources a large part of his organisation. This is not unusual. The business case stacked up – just about. It was the CFO that awarded the contract. Procurement were involved to the extent that they were given sight of the contract. They pointed out that there hadn’t been a proper competition and that the contract was way too favourable to the outsourcing business but their protests were ignored. Following the deal, the CFO retired. Well, I say retired – he left the business to take on a well paid job with – guess who.

It was a very courageous act by the procurement professional to protest about this deal. He put his job on the line but he was a voice in the wilderness. Other people could see what was happening but instinctive self-preservation kept them tight lipped. Nothing illegal was done but viewed through a cynical eye, the commercial arrangement of this deal amounted to little short of corruption. And it happened, not because the CFO was a crook but as a natural consequence of the cosy private relationship he had with a strategic supplier.

My other three examples have the same element at their heart. Cosy relationships between local governments, construction companies and their suppliers keep those in the inner circle in jobs. Surgeons and senior clinicians not only enjoy conferences in exotic locations funded by drug companies, they are often paid by suppliers for performing medical research. While attending conferences and being paid to take part in medical trials is perfectly ethical and indeed essential, there is a clear conflict if the same people that are making commercial decision about the supply of goods and services are also on the pay-roll of those same suppliers. In most industries, allowing the same person that awards contracts (or at least influence that award without full disclosure), to take cash from that supplier could be interpreted as tantamount to bribery.

I want to stress an important point here. Close professional or even personal relationships with suppliers is not in itself a bad thing indeed it is healthy and should be encouraged. But they should also be openly disclosed when it is relevant and proper procurement processes should always be followed to ensure objectivity and integrity. Procurement should be playing a much more prominent role to step in to distance and separate some of these commercial relationships but there are three big challenges. Firstly, non-procurement people are often simply unaware of the potential consequences of not following an open and robust procurement process. The first three examples above illustrate this.  Secondly, Procurement is often gagged or ignored and thirdly, suppliers encourage these cosy senior relationships. It’s in their interest to ensure that procurement doesn’t get involved in commercial deals. Procurement department? Business prevention department more like! Suppliers actively engage in “divide and conquer” tactics in many industries to render Procurement impotent. It’s called selling and there’s nothing wrong with it per se. But when, across whole industries it becomes normal for cosy relationships at senior levels to determine how business is done, then suspect practices become inevitable.

I blame the procurement profession. Procurement is to blame for not showing the gumption to tell to the commercial world the critical role that they play. In their bubble, they chat to each other about the problems they share. They know all about how collusion works and how difficult it can be to manage “expert” choice and close personal relationships with suppliers at senior levels. But they need to break out of the bubble and educate the business about the risks they introduce to the wider business community.

Of course, it is by no means universally true that Procurement is weak or ineffective. In many businesses, Procurement is highly effective. It is recognised as a strategic business function and it enjoys the same influence as finance, sales, operations etc. but sadly, not always. But I would like to issue a challenge. Show me a public company or government department that actively and deliberately relegates Procurement to the back office and I’ll show you bribery and corruption. I mean it! There are only two reasons why Procurement is dismissed as a necessary evil – either people don’t respect the value they deliver leaving loopholes that can be exploited or it is done deliberately to conceal existing questionable practices. Either way, the only people that can fix this is Procurement.

Pete Loughlin can be found on twitter @peteloughlin

*Quotes taken from Building Better Healthcare

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