As procurement managers re-balance price v risk, and try to incorporate more and more wants into the purchase equation, Jonathan Dutton FCIPS asks what is value – can it only ever be in the eye of the beholder?
As Covid hit hard, just over one year ago now, procurement managers suddenly became extraordinarily busy. Stakeholders wanted urgent help from procurement – and they got it.
Particularly, internal stakeholders wanted critical supply lines secured, fast. They wanted new stuff (PPE mainly) delivered right now, to keep businesses operating. And they wanted regular non-essential supply lines paused, with no questions and no quibbles. Internal stakeholders were re-evaluating procurement’s role, and procurement was responding quickly to changing needs.
Over those first few months, whilst working from home, procurement practitioners everywhere became much more aligned to genuine business needs. They helped re-manage the balance between service-for-users and governance-for-the-business. They responded to the breakdown of paper-processes, on which procurement has long relied, and they even helped users find short-cuts to get things done quickly. They forged new, stronger relationships with suppliers (and stakeholders) and learnt to negotiate on video and online. And stakeholders loved it all.
Procurement in 2021
Today, these successes have led to a new problem. Quoting nine months or more to source new requirements is now, more than ever, unpalatable – “you did it in three days during the pandemic” says your stakeholder!
What the stakeholder is overlooking, of course, is that balance between service for them and governance of the process. Procurement managing down corporate risk, for sure, but also managing more value into the purchase decision.
In recent years, as savings have diminished towards zero over time (as we have discussed before), procurement was urged to get more and more into their purchase equation: savings yes, cost avoidance too, less risk, more compliance and greater sustainability. Quite a lot really.
Yet, interestingly, procurement in 2020 seemed to follow a classic pathway. Research during the pandemic by the Grosvenor Performance Group highlighted the early priority of risk management on inbound supply chains. Yet, subsequently, COST once again became the top priority some six months into the pandemic as organisations cut draconianly to manage low demand – and then look to fiscal repair. However, by Christmas 2020, it seemed, in the third trimester of the research, that sustainable and social procurement had made something of a comeback – from the hiatus begun March 2020 as the pandemic kicked-off. The sequence of risk, cost and sustainability cycled through 2020.
Sustainable procurement now
After the launch of the new global standard ISO 20:400 on Sustainable Procurement in May 2017, the working definition of ‘sustainable procurement’ has widened considerably. No longer just environmental aspects or buying -green but also cause-related buying, policy driven procurement decisions and economic development considerations.
In other words, ‘sustainable procurement’ as a practical term now includes social procurement, ethical procurement, environmental procurement, indigenous procurement and economic development. Increasingly, stakeholders have seen that procurement can act as an instrument of policy – which begs the question: What is your policy?
Procurement was making real progress on all these ‘sustainable procurement’ questions as the pandemic approached. Genuine momentum in most aspects of sustainable procurement was almost mappable. Obvious examples included the progress of buying from indigenous owned suppliers and the implementation paths on modern slavery act requirements enacted by so many organisations.
Yet, early in the crisis, one CPO described a view on sustainable procurement matters succinctly, “who cares about that now, we are trying to save the business.” Others agreed. You see, their definition of ‘value’ had just changed. They suddenly valued saving the business over solving modern slavery now. So, interpretations of value change – context matters.
Sustainable aspects contrived into purchase agreements can sometimes not add the value that was intended. Partly because this material relevance is not present.
CASE STUDY – Relevant
A large Aussie mining company operating in Africa was flying in workers from Perth at great cost. Local employees were capable but often not well enough to work or were illiterate. The miner helped rebuild the local village; dig a fresh water well, open a school, start and fund a clinic. Ten years later FIFO worker numbers had dropped massively as locally-hired workers offered a 70% saving, and their income regenerated the village to sustain progress. The relevance of the miner’s generosity also served their business case.
CASE STUDY – Irrelevant
A significant manufacturer was promoting their track record in procurement as a benefactor of a range of social procurement efforts to buy local and support the local community. Yet they studiously ignored the protestors at their factory gates, protesting about the dead fish in the polluted river behind the factory – and the fact the company was not seemingly doing anything about that, but proffering contracts to local suppliers to ease local angst.
Definitions of value
So, context matters. So does relevance – or the corporate social responsibility (CSR) industry word for relevance; materiality. Because with materiality, value rises.
Inescapably, things that matter add value. Things that do not really matter (often bells & whistles) do not add value if they are never used. So why pay for them at the outset? Which product/service elements add value, which will not? Which enact the business case, which are optional extras and immaterial?
Fundamentally, value centres around the usefulness of something – not its intrinsic value, which is always relative. “Crucially, you have to separate “value” from the money – often just its price tag – and resist mixing them up”. Says Prof Roy Barton, President of the IVMA
Value is always comparative. Option A offers better value for money compared to Option B and Option C. You cannot proclaim that Option A simply offers “great value for money” … although you can target getting more “bang for your buck” by negotiating inclusions or by cost avoidance.
You can also compare a purchased value to a value statement you prepare with stakeholders when defining the requirements (and the value) you are looking for in any future purchase. These judgments can drive perceived value.
The Australian standard for value management was developed in 2007. The Institute of Value Management Australia (IVMA) www.ivma.com.au led by Prof Roy Barton, the president, was instrumental in forging this Australian globally recognised standard ISO 4183. Value Management is defined as a structured and analytical process which follows a prescribed work plan to achieve best value or, where appropriate, best value for money. Primarily as part of a purchase decision. Studying value management (and its cousins value analysis and value engineering) offer many clues in how to quantify value.
Where value comes from is in the ‘eye of the beholder’ of course. It is they who ultimately judge value. Even when such value judgements change as time and context progresses – a force often at the nexus of supply and demand. Examples are numerous.
The value of strong ESG in future
Today, ESG matters – environmental, social & governance factors. Companies, especially, are increasingly judged on ESG standards by consumers, shareholders and Boards alike, and always by taxpayers (and politicians on their behalf) – never mind the regulators. In other words, ESG is becoming increasingly relevant, because stakeholders demand it.
A poignant CASE STUDY : VIC Govt Hotel Quarantine Security Services 2020
Mixing priorities of value on any purchase decision can directly contribute to bad purchase decisions. Typically, in public service procurement, a regular scale of priorities in purchase decisions moves from cost first, to risk second (sometimes first though), to other tertiary considerations such as sustainable procurement outcomes.
In this high-profile case, purchasing security guard services for the hotels accommodating returned travellers in quarantine, you might expect this order to be adjusted – maybe risk primarily, cost secondary, other considerations maybe nowhere, given the urgency and focus of the contract. Yet as the Victorian Government Enquiry revealed, it seems that the primary consideration of the purchase decision makers appeared to be a non-panel vendor’s commitments to employ disadvantaged Australians as security guards? With the risk of insecure hotels and even escalating cost factors relegated to only secondary consideration?
ESG factors in business operations are becoming much more prevalent today. Key stakeholders such as consumers, shareholders, taxpayers, customers, staff and even suppliers are more concerned over such environmental, social and governance matters. In other words, they now value them more. Their ‘beauty’ is their own balance of these cost, risk and ESG questions. Both in the public and private sectors too.
Defining VALUE is a more critical role for procurement now. Establishing the desired value balance in the purchase equation – before any commitment is made to purchase. What does success look like? What do we value here? What is truly relevant to our business case, what isn’t? What outcomes are we pointedly looking for? And, increasingly, outcomes (plural) not outcome.
Traditionally in procurement this question of desired-outcome centred around the project manager’s IRON TRIANGLE of COST, delivery TIME and QUALITY measures on any project:
Today there are more considerations in any significant corporate purchase decision – which is now usually always made by a decision-making unit (DMU) or group of executives and rarely any single individual; even a procurement manager. Especially if procurement is being used as an instrument of policy, as it often is in the public sector (buy local, for instance) and increasingly is in the private sector (buy indigenous).
So, these other purchase considerations change with policy and over time. They almost always include cost, delivery & quality but also other factors squeezed into the purchase criteria, and often included in weighted scoring criteria on tenders, such as sustainable procurement questions, corporate priorities, PR profile, other stakeholder outcomes. Even strategic considerations (buy from China) or tactical priorities (buy from SMEs so they survive the pandemic crisis) influence purchase decisions today and can deliver great value in certain circumstances.
The definition of VALUE is broadening markedly. And as these attractions vary in the eye of our beholders – the stakeholders – so procurement’s role will become ever more complex and measuring success ever more difficult.
Jonathan Dutton FCIPS has a non-executive role at SUPPLY CLUSTERS and writes a monthly column for the website. Jonathan is the CEO of PASA who run a wide range of procurement events and training programmes each year www.procurementandsupply.com He has also worked extensively in the past as a procurement consultant and is a former interim CEO of the Institute of Value Management www.jdconsultancy.com.au