Jules Goddard and The Fatal Bias – Essential Reading for Procurement

This week we’re catching up on the recent Procurious Big Ideas Summit (see here for initial coverage) with a series of articles around the people and discussions we heard there. Let’s start today with Jules Goddard of the London Business School, who facilitated the event with charm and insight. Goddard also wrote an article last year, which whilst it was not pitched purely at a procurement audience, is essential reading for anyone interested in where procurement is heading.

In The Fatal Bias, which won the “Management Article of the Year Award”* he discusses a recent study from two Deloitte consultants who looked at the performance of firms over a 40-year period. The results of their analysis led them to challenge the view that cost leadership is a generically viable competitive strategy (as per Michael Porter’s seminal work). Here’s Goddard commenting on that study.

“Of the 25,000 companies in Raynor and Ahmed’s sample, only a handful achieved strong and sustained success with this strategy. They conclude that: “Very rarely is cost leadership a driver of superior profitability… it could have turned out that price-based competition was systematically more profitable, or that cost leadership took precedence as a driver of superior performance – but it didn’t.”

The basic conclusion is that you can’t use cost reduction as a long-term mechanism to drive business success. Goddard goes on to say this.

"A climate of excessive frugality focused relentlessly on the denominator of any calculation of returns (whether on assets, capital, equity or sales) ends up being an inwardly-focused culture that, in the words of Oscar Wilde, knows the cost of everything but the value of nothing.

Treating suppliers as a cost to be cut rather than a relationship to be nurtured may be counterproductive in the long run. Those who treat their suppliers in this way may find themselves being treated by their own customers in a similar fashion."

It is a brilliant article, and makes its case very convincingly, but it raises some uncomfortable questions for procurement. Where are most functions sitting currently? Firmly in that cost reduction mindset, targeted on “savings,” looking to control spend, and acting as the internal policeman in the organisation. Yet, as Goddard suggests, the secret for long-term business success is to be able to spend more, but do it in a way that gives the organisation the differentiation it needs to enable it to grow and prosper. As he says:

“ There needs to be a more concerted, more confident focus on opportunities for out-spending competitors, for investing earlier in entrepreneurial ideas, and for using experimentation more routinely.”

So this is one of the fundamental challenges for procurement. We need to re-orientate ourselves into a function that is seen as being strong on costs where that is the appropriate strategy, but also helps the organisation get value from suppliers in the broader sense. To get that value in many cases will mean spending more to drive revenues, margins, brand reputation and differentiation – as we did talk about some of this in our recent briefing paper “Three Occasions When Procurement Should Spend More.”

We’d suggest you read that (available free on registration here) and certainly read Goddard’s article – freely available here. And we will undoubtedly return to this topic soon.

* “Management Articles of the Year” is an annual competition open to academic researchers affiliated to a UK university. It is run by the Chartered Management Institute (CMI) in association with the Association of Business Schools, British Academy of Management, and the British Library.

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