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How Procurement Best Practices Are Stifling Innovation — And What to Do About It

09/25/2018 By


Executives at a large, Midwestern consumer company had an expensive habit: they engaged consulting firms for both strategic advice and support during implementation. Their relationship with at least three of the big consultancies was strong and solid from the top down.

Over time, and in response to market pressures, the company began reducing headcount to meet aggressive performance metrics. The consultants picked up more work. Markets changed, and executives realized the company needed new skills to keep up with evolving demands. Unfortunately, thanks to its geography, it was unable to recruit these skills in sufficient numbers. Again, the consulting firms picked up more work.

Finally, the company reached a tipping point: the consulting spend itself was now on the chopping block. The CFO and procurement team implemented zero-based budgeting and made a serious crackdown on consulting spend. Budgets were slashed, and executives were asked to justify all external spend on a de novo basis, not just relative to the previous year’s amounts. A rigorous RFP process was enforced at ever-lower spend levels.

What happened next? Lots of pain. Lots of indiscriminate pain. Executives were overwhelmed with work, and without access to the resources they had traditionally relied on for help, it either didn’t get done or was perpetually behind schedule. Growth stalled. And important, innovative product ideas never seemed to get off the ground.

The Law of Unintended Consequences

This story is not unique. Many companies have discovered that best practices for managing professional services spend have imposed financial discipline but have come at the expense of innovation and organizational agility. Now, growing interest in agile development methodologies — in which small, cross-functional teams are empowered to work independently on complex problems — is prompting procurement officers to wonder whether the on-demand talent marketplace could help them regain ground at a lower price point.

After all, the push for agility is driven by a need for companies to respond more quickly to opportunities and threats by nimbly adjusting the assets — including human ones — they put against each one. And the freelance marketplace offers near limitless access to a dynamic array of skills that can be deployed against specific initiatives on a temporary, as-needed, outcome-driven basis.

Unfortunately, few companies are set up to take sustained advantage of this new resource. Why? Because they are hamstrung by professional services best practices that create clumsy barriers to the on-demand talent marketplace, rather than well-managed channels. This may seem counterintuitive. Yet the processes that help focus and curtail spending with traditional consulting firms inhibit the exploration of agile talent and curtail the value creation potential of the on-demand talent marketplace.

Think about this simple contradiction: If this marketplace can deliver exactly the right experience and skills to you for a tightly focused, three-week effort that needs to get started on Monday, but internal processes delay that start by three or four weeks, what value has been created? And if a small, exploratory consulting project is evaluated in a formal RFP process that major firms have spent decades perfecting with fancy charts and lots of contextual IP, the larger, more expensive, and more over-engineered option is almost sure to beat the leaner, on-demand option — negating the potential for transformative savings and better-fit solutions.

Here’s where things go wrong — and what you can do about it.

RFPs Make It Hard to Get The Right Fit

There’s nothing earth-shattering about the idea that head-to-head competition can yield better results. RFPs also make it easier for companies to compare different vendor approaches, and they often lead to better pricing.

However, the process can be painfully slow and bureaucratic, sucking the momentum out of projects that should have been started long before bids were solicited. More ominously, RFPs make it nearly impossible to evaluate a prospective solution’s fit; the people who pitch are rarely the ones who are going to be doing the work, and restricted access to the real client makes it difficult for vendors to match their offerings to what’s truly needed.

Because of this, many vendors oversell and overdeliver, using a “full turnkey” mentality that may not actually serve client interests. And that, in turn, leads to misleading, apples-to-oranges comparisons between traditional consulting solutions and those of newer, on-demand talent marketplaces. The best on-demand solutions curate talent to fit the exact problem and moment that you face. Traditional solutions, on the other hand, aren’t set up to respond in more nuanced ways that align better with the pace the organization can tolerate or the level of engagement the client wants to have. Would you commandeer your Rolls Royce to shuttle kids to soccer practice or race a Maserati on congested Manhattan streets?

Unfortunately, frameworks for evaluating traditional vs. on-demand solutions are still evolving. We’re confident that real innovations are being tested and will emerge. In the meantime, there are things you can do to make sure your RFP processes don’t stifle innovations in human capital.

First, set a reasonable floor for expenditures below which RFPs are not required. Next, set up policies that allow for smart exceptions. This doesn’t mean opening the door to each quote-in-hand situation. It means recognizing that the on-demand talent marketplace makes it easy to explore new solutions, fast. So when it’s important that a project starts quickly, or when it requires highly specialized expertise, you should evaluate on-demand options before moving to an RFP.

Finally, educate yourselves and your key business partners about how pricing and proposals are elicited in the on-demand marketplace, so that the process is demystified and everyone has faith in the power of marketplace models to yield the right price for the job.

Rate Cards Emphasize Tenure at the Expense of Expertise

Rate cards are a wonderful way to force straightforward, meaningful comparisons from firm to firm. They front-load and aggregate pricing negotiations, and they make it easy for management teams to calculating savings.

Yet they also subject companies to sophisticated pricing games as vendors adjust per diems to hide total project fees. And they obscure critical differences between the world of traditional consulting and on-demand talent solutions, where there’s little correlation between the tenure of a resource and the role he or she wants to play — and is great at playing. Think of the management consultant with pharma R&D experience who loves to serve as engagement manager even though she has 20 years of experience. Or the AI specialist who’s served 20 companies in five industries and is just a few years out of school.

What’s more, the on-demand universe is powering new types of teams that have no analog in traditional firms. A traditional management consultant paired with a knowledgeable executive. A dream team of partner-level consultants who do the work themselves instead of outsourcing it to a team of junior consultants. A single specialist with niche expertise who’s available for more than a 30-minute phone call.

The simplest fix, of course, is to find out which of these new solutions have been successful at your company, then add them to the list. It also helps to work with on-demand vendors that rely on dynamic marketplace pricing — and are transparent about it when they work with you.

Preferred Vendor Programs Leave a ‘Long Tail’ of Spend Unaccounted For

There are several benefits to streamlining the number of vendors you work with: by aggregating demand, you trade volume for a lower unit cost. You can also work in partnership with selected vendors to innovate processes and reduce transactional costs. Many preferred vendor programs in professional services have positive ROIs and align well with company objectives around large consulting projects.

Nonetheless, there is often a “long tail” of spend that happens outside your preferred program and is therefore unaccountable to it. These projects are generally smaller in size, more deeply focused by function or area of expertise, and are typically served by specialized boutiques that are sourced through a personal relationship. They tend to fly below the procurement radar — and yet they add up.

On-demand marketplaces can let in some light here, both for procurement and for your business partners. They centralize project exploration and buying activity in a way that’s easier to align with existing operations. And they introduce a cost-effective way of ensuring that competition is at work, delivering the right talent and solutions at the right price.

The keys to setting up a well-managed channel to the on-demand marketplace are trust, education and operational alignment with the offering vendor. Trust in the solidity of the total business model, from matchmaking to proposal development to risk indemnification and the quality-control processes that support each project’s success. Education of key buyers of professional services about where and when an on-demand solution is a better option, not just a cheaper one. And operational alignment where, to the best extent possible, the on-demand marketplace works with your existing processing machinery for spend authorization, purchase order generation and payment flows.

So, what became of our Midwestern consumer company? Looking for a safety valve, company executives were forced to try something different. They began with a targeted but exceptionally important initiative: prioritizing disruptive threats to their supply chain for a board presentation. Eschewing the exhaustive approach that a traditional firm would have taken, they engaged a tightly focused, all-expert team of independent consultants, who delivered faster results, deeper and more pragmatic insights, for a lot less money. Then, buoyed by this high-profile success, they began to explore what an enterprise-wide installation might look like — inserting specialized help with strategy and implementation, bridging access to in-demand skills like digital marketing and design thinking.

The company went on to implement a special, procurement-sponsored program for consulting work using trusted on-demand marketplace vendors. Procurement leaders adapted a number of policies and invested in internal marketing to help their consulting buyers get comfortable with the program. The goal is not to disrupt their existing professional service procurement best practices but to augment them in an intelligent way to revitalize growth and innovation.