A Critical Look at Category Management (Part 2)

Editor’s note: This Spend Matters Plus brief is a refresh of our 2013 series on category management, which originally ran on Spend Matters PRO. 

As we wrote in Part 1 of this series, category management (“CatMan”) has been perhaps the most powerful sourcing tool in the procurement armoury for some years. But 20 years on from the beginnings of its widespread adoption in the general procurement world (it has earlier origins in retail), we think it s a good time to review the state of CatMan and ask some fundamental questions. Is it still relevant? Has it outlived its usefulness? Does it need radical updating? Or is it still fit for purpose?

The first issue we’ll look at today is around the strengths and weaknesses that arise from the standardised nature of category management. Now the process and accompanying tools were largely designed and promulgated by the consulting profession and a number of the features – deliberately or fortuitously – fit the consulting model very nicely.

The five, seven, or nine-step process generally started with a major data gathering exercise. Information was collected about suppliers, markets, internal specifications and requirements. Often a “spend cube” was developed, often at considerable expense to the client in terms of consultant time. This was great work for consultants because it relatively junior staff could do it – and as we know, they are actually the most profitable people for the consulting firm.

Contemporary spend analytics technology has now made this part of the process much quicker, easier and cheaper – in theory. But we still see consultants selling expensive data analysis project or stages within CatMan processes – building Excel models when third party technology would be more appropriate. So whilst that is a bit of a sideline to our main point here, it’s worth understanding.

Once data was gathered and analysed, there was a general presumption that a core part of the category strategy would be a competitive process. That was often accompanied by aggregation. So the data would enable the buyer – or the consultants – to identity the total volume of spend in the category and sub-categories, across the entire organisation, and then go to market with that requirement. It may have been divided into lots or positioned for a multi-supplier strategy, but an approach that looked to reduce supplier numbers along with the aggregation was very frequently used.

Is there a problem with this? Well, the answer is “perhaps.” The most important point is that whilst it may be a sensible approach, it is vital to look at every category (and indeed sub-category) on its own merits. This was something consultants and, to be fair, internal buyers often didn’t do, in my experience. There was an automatic presumption that aggregation, suppler consolidation and a competitive approach to the market via a sourcing process of some sort was the desired strategy.

Now being very cynical, that’s not surprising if you look at it from the consultant’s point of view. After the bonanza of data gathering, the next process that could be sold, with the benefits from the consultant’s standpoint of both standardised process and significant workload, would be a set of similarly structured tenders. Each would require major effort in terms of developing specifications and tender document, evaluating multiple responses, negotiating, and contracting.

To consider the cost that this could require, I know of one major U.K.-based organisation that spent over £10 million in two years on consulting fees for their CatMan programme – a programme that almost totally failed to deliver what was expected. We’ll come onto the reasons behind that particular failure next week, when we look at other weaknesses in the process, but that gives an idea of just how much money has been thrown at these programmes.

The weaknesses of a standard approach are evident when we really think about it. Of course, aggregation sometimes is the right approach. But a standardised approach for all categories is just conceptually wrong. For a start, economies of scale apply differently in every category, and are hugely overestimated by most procurement organisations and people.

Similarly, supplier reduction is not always the right strategy. Sometimes more suppliers can be the right way to go, increasing market power or introducing innovation and variation into the mix. Splitting a requirement into smaller batches may give more flexibility, innovation and ultimately value. And sometimes negotiation with current suppliers or contract extension is a better option than going to market.

So our main criticism here against category management is that it has encouraged this one-size-fits-all approach to procurement. We often see complaints from providers of complex categories like marketing or professional services that “the buyer is treating us as if she’s buying stationery”. Now of course there can be some self-interest in these complaints, but I’ve seen too many examples where this is true (and ends up with business disadvantage for the buying organisation) to completely reject that charge.

Let’s be positive now: this is by no means a fatal flaw! It can be addressed within the CatMan process and the seven or nine steps can still be valid. But it needs the users of CatMan to make sure they’re not sucked into a standard approach, and to remember that the “thinking” stage of the process is where they really should consider ALL the options.

In the next part of this series we’ll dig into some further weaknesses of a “traditional” CatMan approach. We’ll also make some constructive recommendations as to how such issues can be addressed for those who are still following the gospel according to Kearney and their friends.