As the US government heads down its tenth day, I reflected on the stupidity happening in DC and thought I’d try to find a procurement analogy and apply a few lessons learned. In this analogy, HR (played by the Democrats) passed a policy to mandate the use of a benefits policy and associated benefits administrator that Finance (the Republicans) didn’t particularly approve of. But, the CEO (President Obama) liked the idea, and supported HR. So Finance told its AP group to stop paying the third -arty administrator as a sign of protest. However, AP responded that it couldn’t withhold payments to one entity (i.e., defund “Obamacare”) without withholding payments to all entities. Finance didn’t care. Heck, it’d improve its working capital metrics, and besides, it stretched payments in previous times, so this was no big deal. And, Finance would use this as a way to protest the supplier selection results (especially since it felt that the selection process was rigged) and force HR to delay supplier implementation. Since budgets were getting set for the next year in the coming weeks, Finance also wanted to use the crisis to reduce HR’s budget and defund the benefits line item.
Unfortunately, with suppliers not getting paid, they initially showed good faith, but eventually had to cut the cord. The temps and contractors stopped showing up. The cafeteria shut down. Security guards and janitorial staff stayed home (yuck). Raw materials stopped flowing into the plant. Even the corporate limousines stopped coming! A bad scene all around.
So, what could have been done to prevent this? What could Procurement have done? What lessons can be learned? There are several.
First of all, the root cause here is that it seemed to Finance that the vendor evaluation selection was rigged and that a back room deal was made. Its lack of buy was poisoning the well. Procurement has to make sure any selection process is clear and clinical so that everyone buys into the process. Using collaborative sourcing techniques (enabled by sourcing optimization) can greatly help here.
Secondly, be careful what you wish for and don’t offer a solution that’s not well thought out or may have unintended consequences. For example, getting a mandated procurement approval threshold will overwhelm procurement, delay the process, and set procurement back even further in the mind of stakeholders.
Third, separate the “authority to spend” (i.e., budgeting) with the “authority to contract” (i.e., approving Contracts/POs greater than a certain amount or meeting other criteria) and the “authority to pay” (i.e., invoicing/payments). If Procurement is seen as a budget reducer and lackey of Finance, that’s a problem. P2P workflows must have clearly defined and articulated separate approvals for spend approvals (Finance/BU driven) and contracting (Procurement/Finance/BU driven). Obviously the separation of duties separates authority to pay, but “over separation” by holding up payment because there were poor upstream controls (e.g., “no PO no pay”) is almost as bad.
That said, malfeasance by process participants must be dealt with quickly and forcefully. The Republicans tried to reject Obamacare 45 times, and then opted to take down the entire government. If any real-life AP department were directed by the CFO to reject the HR invoice 45 times, before not paying ANY invoices until the contract was nullified, the entire department would be summarily sacked, along with the CFO.
Of course, governments are not corporations, and there’s inefficiency in both. But, the more that procurement can drive best practices that are supported by best technologies, the more it can help put itself in a leadership position to help the organization to spend less and spend better.