3 Strikes? Your ROI on Purchasing is Out!

Spend Matters welcomes this guest post from David Wadler, CEO of Vendorful.

Some people suggest that the chances of generating good ROI on a major purchase are effectively a flip of a coin. Unfortunately, those odds may be wildly optimistic.

In 2015, the Boston Consulting Group published a report detailing the results of a study about large IT purchases ($10 million or more). The study found that the odds of successful delivery — on-time, on-budget and meeting the specified objectives — were roughly 10%. Put differently, achieving a positive result on such a project would be closer to flipping a coin and getting heads three times in a row.

Procurement challenges aren’t limited to big IT initiatives. Indeed, with trillions of dollars in corporate purchasing transacted every year in the U.S. alone, there are all sorts of opportunities for things to go awry.

While an exhaustive analysis of purchasing challenges is beyond the scope of this document (and could imperil sales of Ambien), there are three bad patterns we’ve seen repeatedly in our research that endanger success.

No Process

Accenture reports that under half of indirect spend — which is huge, accounting for 15%–30% of revenue for most companies — is not managed professionally. It’s not terribly surprising, then, to see poor return on investment when the due diligence process supporting the purchase is non-existent.

While employees may chafe at the idea of running a formal purchasing process for something that may be perceived as non-mission critical or commoditized, there is a strong commercial rationale for doing things “the right way.”

Vendor Influence

On the surface, vendor selection may seem similar to dating. You take a bunch of meetings with counterparties who are on their best behavior, trying to decide which one you like best. You, the buyer, are the one being courted.

When you contemplate that natural information asymmetry between buyer and vendor, however, you realize this is akin to dating someone who spends way too much time looking at your social media profiles while tightly controlling access to his own.

Vendors know more about their offering — and often as much about your needs — than you do. And they are often happy to put this information to work as they seduce you over a nice steak dinner. Regrettably, the best vendor-provided meal does not always correlate with the best purchasing decision.

Lack of Stakeholder Involvement

Working in procurement can be a thankless job. Unfortunately, the following cycle is not an uncommon occurrence:

  1. Organizational stakeholders pass a vague list of requirements to the procurement department and then “check out” of the process.
  2. The procurement department, which has no expertise relating to the prospective purchase (especially when it’s indirect purchasing), tries to build a process on the foundation of the requirements.
  3. Vendors “beneficently” offer RFP templates to the buyer.
  4. The buyer uses a template and ultimately selects the vendor that provided it.
  5. The stakeholders are upset at the outcome because the selected vendor’s offering doesn’t fully align with their requirements, many of which — it turns out — were not clearly communicated in the first step.
  6. Wash, rinse, repeat.

If you’ve worked in and around procurement, surely some of these concerns resonate with you. Here’s the thing: humans are naturally inclined to have a short-term bias. Consequently, there is a mental hurdle to engaging the up-front work.

This is true for all manner of things, not just purchasing processes. The good news is that simply developing and adhering to a robust process can mitigate the above-described problems. And running your vendor selection process the right way is a game-changer for maximizing ROI on purchasing.

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