In a March 7, 2017 article Spend Matters published 3 Ways for Procurement to Prove it’s Value (Other than Cost Savings). The article addresses Revenue generation, operational efficiency, and retaining top talent as it’s three observations.
These three business goals are seldom associated with procurement, but when deployed strategically, I have no doubt that procurement can impact these areas.
While I wholeheartedly agree with Spend Matters perspective, I found the examples they cited for how procurement can impact these areas shortsighted.
To further enhance their point, I want to share some additional perspectives.
Spend Matters cites negotiation of great rates on support items for sales teams as a way procurement influences revenue generation. While this may be true, a procurement team comprised of industry experts can do far more than just save money on travel to support sales.
When your procurement team includes experts in specific fields, you can also expect procurement to bring innovative and creative solutions that enhance revenue opportunities.
Take for example a Client who’s core business requires expansion of an existing warehouse, to support additional volume.
By engaging with experienced construction procurement professionals ahead of development of the design, the procurement team helped the Owner’s construction management team consider alternative construction techniques.
Collectively, the team was able to identify new and innovative construction methods that helped save time and money in construction. This allowed the Client to build additional square footage which further enhanced their ability to promote and market their business.
The results of these strategic procurement decisions increased capacity and directly affected the Owner’s revenue growth.
The article from Spend Matters discusses operational efficiency merely from the perspective of engagement and alignment with other internal teams, but when I think of how procurement can impact operational efficiency, I think of streamlining contracts to ensure smooth and predictive progression of a project.
Let’s consider the way a traditional design bid build lump sum (DBBLS) contract typically works. The project is broken up into several distinct phases of work. In this model, there is a natural start and stop with stages of limited progress in between. You then have two entities (a designer and a builder) who (by the nature of their lump sum agreements) are at odds with each other and in the worst examples can be fierce adversaries.
A skilled construction procurement specialist can mitigate all of the inefficiencies of this common model by employing alternative delivery and pricing models.
The same project can be delivered using a hybrid Integrated Project Delivery (IPD) model with Cost Plus open book rates that convert to a fixed price. This type of engagement not only mitigates any delays in progress of the project, it also alleviates the competitive nature of a DBBLS contract. IPD projects promote collaboration between design and construction which ultimately reduces change orders and mitigates delays caused by conflict between the parties. The cost plus pricing models allows early engagement of the builder and reduces risk from both the Owner and the Builder allowing for a truly collaborative environment to develop.
This is true operational efficiency which can only be driven through procurement.
Retaining Top Talent
Spend Matters addresses talent retention quite well by noting how working with the best vendors enhances employee experience.
I have several friends who have the unfortunate task of managing a team that is entirely made up of contingent workers. Their tales of frustration managing low cost providers with little to no incentive for quality remind me that strategic procurement is not about awarding the lowest cost.
Procurement balances quality with cost and reinforces the former with key performance indicators and service level agreements that are part of the Vendor’s agreement.
To round out Spend Matters article on how procurement proves its value (other than savings) I have to mention risk mitigation.
Risk is inherent in every engagement, but creative application of delivery and cost models can mitigate the risks for all parties. In my prior example the use of a cost plus pricing model not only enhances operational efficiency it also mitigates risk.
To understand how this happens, let’s first consider the risk inherent in a lump sum contract where the builder must quote a firm fixed price for the work.
The Architect is at risk because the Owner expects their drawings to depict the full scope of the work. The builder is at risk because they are expected to catch every aspect of the drawings and raise concerns ahead of quoting their fixed price (typically under a time constraint). The Owner is at risk because change orders uncovered in latter phases of work typically cost more.
If we use Cost Plus open book rates that convert to a fixed price, we can engage the builder ahead of completion of the drawings. This allows for the builder to perform constructability reviews before the drawings are completed. These early reviews promote collaboration between the designer and the builder and also allow the builder to become familiar with the drawings ahead of construction. This early engagement serves to minimize the risk of change orders for all parties.
The open book aspect of this model gives the Owner transparency and relieves the builder of any risk they may have for sub-contractor selection by involving the owner (and sometimes the designer) in the process.
Lastly the conversion to fixed price gives the Owner price predictability at a stage where all parties have clear understanding of the scope. This has the net effect of minimizing the risk of change orders or schedule delays.
Creative application of cost and deliver models is another great way that procurement shows it’s value by mitigating risk.
When procurement is deployed strategically, it can make positive contributions to these and many more business objectives.
The key for availing yourself of these procurement benefits is engaging with category experts early in the process and to remain open to the various options available to you.
So how have you engaged with procurement? What benefits (other than cost) have you seen from procurement? Tell me your stories.
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