Spend Matters Premium Content:
Procurement

Risky Business — Our Illogical Attitudes to Risk, Regret and Gambling [Plus +]

supply risk

We've featured aspects of Daniel Kahneman's brilliant book, Thinking Fast and Slow, over a number of articles looking at his concepts such as Priming and Anchoring, and in particular what they (and other ideas he and others in the field have developed) mean for procurement professionals.

Kahneman won the Nobel Prize for Economics, with his collaborator Amos Tverksy — not bad going for two psychologists. And the work that led to the prize was largely around the area of risk, which is what we will look at today.

He and Tversky showed that the assumptions economists made about human behaviour — that we acted rationally in hard economic terms — could be proved false. That meant many of the standard economic models and theories were also flawed, which rather upset many in the economics community!

Kahneman called the strange beings who behaved in this perfectly rationally manner "econs" as opposed to "humans," who behaved — well, like humans do. And his work on risk shows exactly why the assumptions of rationality doesn't hold up. Our decisions aren’t rational — but driven by factors like the “endowment effect,” risk-aversion, and regret.

There is obviously a huge amount of detail that we could look at here — an entire Nobel Prize's worth, we might say. But we will just focus on a few key conclusions and a handful of implications for procurement. As before, we strongly recommend you read the book if this interests you (and, really, it should).

So let’s get into three key Kahneman findings.

Hone Your Procurement Negotiation Skills By Learning the Right Way to Think [Plus +]

In our previous piece looking at Daniel Kahneman's brilliant book, Thinking Fast and Slow, and its implications for procurement thinking and practice, we looked at the concept of Priming.

Granted, Kahneman published the book in late 2011, but is still immensely valuable for procurement practitioners to keep on their bedside tables today — and here's why.

One of the central premises of Kahneman's book is how our brains look for the easy route at all times, what he calls "System 1" thinking. If we can draw a conclusion, make a decision, or find a belief without actually going through a time-consuming and exhausting process of really thinking, we will. That is not our conscious decision — our brains are wired that way. "System 2" thinking, which is more logical, analytical and difficult, is something our brains avoid if they can.

So Priming is the phenomenon whereby something we've seen or heard recently influences our next thoughts. If I ask you to name an animal, and you've just walked past an advert for the zoo illustrated with an elephant, you are more likely to say "elephant." And remarkably, this is true even if you don't recall seeing the advert. Our sub-conscious is quite capable of priming our future thoughts.

In this Plus brief, we will consider what is in effect a particular sort of priming, with an obvious implication for procurement and negotiation behaviour specifically. Anchoring is the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision.

In Kahnemann's words, "it occurs when people consider a particular value for an unknown quantity before estimating that quantity." The estimates then stay close to the number considered. And this is one of the most tested and robust results in experimental psychology; it is an absolutely proven phenomenon.

In a somewhat frightening example quoted in his book, German judges were asked to throw a dice before being asked what sentence they would give for a particular crime. The dice came up with either the number 3 or 9. When the dice said 9, the average "sentence" was 8 months. When it said 3, the average was 5 months!

Anchoring and Procurement Negotiation

The implication for procurement is very clear in the negotiation arena. Whatever number gets anchored in your brain is in danger of becoming the starting point and indeed the expectation for the negotiation. You may work up or down from there, but it is difficult not to mentally accept that as an anchor for the discussion.

Let's get into some tangible examples.

Using DMAIC 2.0 to Blow Up the N-step Procurement Process [Plus +]

An n-step chevron process is a siloed procurement-centered sourcing methodology geared towards supplier rationalization. It’s a fine start for procurement hitting cost savings goals, but it’s not a great way to align to the broader organization as procurement evolves. So, we’re proposing DMAIC as an emerging, superior approach, but it’s far beyond the DMAIC that you usually think of. The n-step sourcing process has had a good run, but let’s not try to make it do unholy things. Read on to see how other companies have used DMAIC.

Chief Procurement Officer: Is There a Place for Consensus Decision Making in Procurement?

Chief procurement officers have a lot on their minds, in addition to a lot of responsibility — dealing with the CFO, pleasing stakeholders and delivering increasingly higher returns with increasingly lower investment, just to name a few. So maybe, just maybe, it'd be advantageous to consider peer opinions when making important decisions? Peter Smith, chief research officer and managing director, Spend Matters UK/Europe, presents: Should CPOs Use Consensus Decision Making? A complimentary research brief from the Spend Matters team, this paper focuses on the growing trend of consensus decision making in business and procurement and whether it is truly the correct approach. Get your copy today!

Spend Matters Research: Using Digital, E-Signatures in Procurement and the Supply Chain

digital signature

There's more than meets the eye to e-signatures and digital signatures. These are not simply replacements for handwritten signatures on contracts, and we are here to explain why. Jason Busch, founder and head of strategy at Spend Matters, presents: Use Cases of E-Signatures and Digital Signatures in Procurement and the Supply Chain, a new, complimentary research brief from the Spend Matters team. Jason knows where the hands on the procurement and supply chain clock land when it comes to digital and e-signatures. This research brief lays out how these solutions can play a crucial role in supporting end-to-end source-to-pay (S2P) and associated procurement processes. Get your copy today!

Last Chance to Register for Tomorrow’s Webinar and Learn Advanced Case Studies in Smarter Catalog Management

catalog

This is your last chance to register for tomorrow's webinar, Teaching an Old Dog New Tricks: Advanced Case Studies in Smarter Catalog Management. Join us at 10 a.m. CDT as the Spend Matters and jCatalog teams walk you through how progressive procurement organizations are enticing stakeholders with more nuanced approaches to support complex category-specific supply chain requirements. The old-school catalogs that often get a bad reputation are history. Advanced smart catalogs are replacing them and promoting a guided buying process essential to the procurement and supply chain world. Register today!

Last Chance to Register for Tomorrow’s Webinar and Learn VMS, Services Procurement Technology Best Practices

VMS

This is your last chance to register for tomorrow's webinar, VMS and Services Procurement Technology Selection in 2015 – New Tools, Shifting Strategies, False Prophets and More! Join us at 1 p.m. CDT as Jason Busch and Andrew Karpie, our resident services procurement experts, explain how VMS technology has changed drastically in recent months and recommend best practices for adopting a solution. This is an absolute must-attend for procurement professionals and other business managers. If you are considering implementing a VMS or other services procurement technology solution, (e.g., a freelancer management system) then this is the event for you. Register now!

Webinar Nov. 4: 500-Level Catalog Management to Meet Your Supply Chain Requirements

Enter a new revolution of advanced smart catalogs to support complex category-specific requirements in the supply chain and attend our webinar on Wednesday, Nov. 4 at 10 a.m. CDT. Teaching an Old Dog New Tricks: Advanced Case Studies in Smarter Catalog Management will feature Spend Matters and jCatalog, and will highlight trends and case studies in using catalogs for a guided buying process to make P2P successful for both stakeholders and procurement.

NEW Webinar: Procurement Savings We Promise You’ve Missed

procurement

We've talked about savings in procurement in the past, and depending on your role, chances are you know a thing or 2 about spend analysis to drive sourcing and category plans; mining invoice and payment data for recovery opportunities; and tracking commodity, currency and other indexes to unleash total cost and savings tracking. But, oh, there's more. Join the Spend Matters team and Tungsten for the webinar, Procurement Savings We Promise You've Missed, on Tuesday, September 29, at 10 A.M. CDT.

Last Chance to Register: Webinar to Show You How to Present Your Best Procurement Business Case

procurement business case

This is your last chance to register for this afternoon's webinar and learn The 7 Deadly Barriers to a Successful Procurement Business Case. Pierre Mitchell, chief research officer at Spend Matters, and Dipan Karumsi, managing director, operations advisory services at KPMG, will give you the confidence you need to makes the case to your CFO, who is increasingly upping his or her standard of what constitutes successful ROI. Register here and join us at 12 p.m. CDT. (Can't make it live? Register anyway and we'll send you a copy of the slides and recording of the webinar for you to review at your convenience.)

Hot Off the Press: Looking Back at Strategic Sourcing to Project the Future of E-Sourcing

sourcing

Brand new hot-off-the-press research is now available from the Spend Matters team! Jason Busch, founder and managing director, and Thomas Kase, vice president of research, present The Past and Future of Strategic Sourcing – Looking Back to Look Forward at E-Sourcing. What does the future hold for strategic sourcing? Have we reached the full value potential for this segment or are there even more savings to be had? Get the full story here!

Xchanging Shares Plummet on Half-Year Report – Questions About Future of Procurement Business [PRO]

stock prices

The half-year results for Xchanging released yesterday were intensely disappointing to shareholders, who saw the value of their shares fall by 20% instantly, to a new 3-year low of £0.97. That is still above the bad days when founder David Andrews resigned, in 2011, after major profit warnings, and the shares fell to £0.50, but the current price is close to half what it was as recently as last autumn. We typically view Xchanging as a procurement outsourcing business, yet the results highlight 2 points. First, the procurement outsourcing and software element only accounts for some 6.5% of total revenue – £13 million out of £200 million. Yet it also casts a very long shadow, in that the poor results are being almost totally laid at the door of the procurement business. Before looking at the specific procurement issues, just run through the headlines. Gross revenue was £240.2 million in the half year, down from £282 million compared with a year earlier. Net income was £199 million against £205 last time. Operating profit was £20.4 million against last year’s £20.0 million, but statutory operating profit was down from £24.2 million to a loss of £41 million after the write-offs, discussed below. In terms of the divisions, the business process outsourcing (BPO) arm lifted adjusted operating profit 8.8% to £28.4m, with the technology segment 52% stronger at £4.1m. Procurement, which contributes just 6.5% of net revenue, saw some growth in the software business but a weak performance in the traditional outsourcing business, combined with underperformance in one of the new “tail-end spend management” contracts. “Net revenue was £13.0 million (HY 2014: £15.9 million), and the adjusted operating loss was £6.8 million (HY 2014: £1.7 million loss). This was after allocating central overheads of £1.8 million (HY 2014: £1.9 million),” the company said in its half-year report. “