What Is Value in Procurement? — A University Lecturer’s View (Part 1b)

Dr Jo Meehan, senior lecturer in strategic purchasing at the University of Liverpool Management School,  continues her exploration of the meaning of Value in procurement -- to be followed soon by part 2 examining further the value of group buying, and when buying bigger opens a bigger value proposition. 

When is value considered?

It’s useful to unpick the behavioural economics - cognitive, emotional, psychological and social factors - that surround decisions we make about value.

If we consider value in terms of the impacts of our decisions, the ripple effects are in the future. They are harder to predict but also harder to engage with and care about. But to get a wider picture of value, procurement teams need to engage with a range of stakeholders over the long term.

Take the steel crisis. Today, everyone agrees that buying British steel is important but two years ago they didn’t. If wider stakeholders such as local communities had, two years ago, been considered by the procurement teams of hundreds of steel buying companies, then the Port Talbot steelworks may have had a more secure future.

Value judgements weigh up wins against losses. Loss aversion theory suggests that if we think we are winning, we play safe. If we think we are losing then we take more risks. Company-centric perspectives of success, pressures to match competitors’ prices and savings targets can make organisations feel like they are losing, increasing the chances of risky procurement.

Time discounting effects show how people generally overestimate wins and underestimate risks – a natural human instinct. People also give greater weight to short-term wins. Issues in the longer term are harder for us to see. This makes it harder for procurement professionals to move towards life-cycle thinking.

Value assessed by which criteria?

Putting a price or score on value helps us to assess our options. But problems arise when we artificially put money proxies against value. Saying £5,000 of environmental damage is better than £7,000 excuses our decision making and the true significance of the damage is lost.

Exposure to information also anchors our judgements of value, particularly around price. In experiments, people were asked whether they would pay £100 for a bottle of unbranded champagne.  Most said no, and when asked what they would pay, they offered less but stayed close to the fictional £100 anchor.  Another group was asked if they would pay £30 for the same bottle.  Most said no and adjusted down but also stayed close to their fictional £30 anchor. Suppliers use opening offers in negotiations and recommended retail prices to anchor our value perceptions.

Highlighting our irrationality in value assessments, even exposure to completely random price anchors (in one famous experiment the last two digits of people’s social security number) can change our subsequent perceptions of value.  Procurement often has poor data and lacks comprehensive market intelligence.  We judge value based on reference points set by previous prices paid or service received, which can be devoid of externally calibrated information thus creating an illusion of value.

Procurement’s role

Procurement professionals need to uncover and challenge how and when different stakeholders consider and assess value, and should push to lead and shape considerations of impact through the procurement process. The fluidity and changing nature of the value proposition over time requires procurement to be agile and responsive to ensure potential value is considered, captured, and critically, not destroyed.

Contract management is often overlooked but can be the cornerstone in the value agenda, and one where procurement could (and should) have a leadership role. While there is a general acceptance of the value of procurement outcomes, as a profession we need to work harder to articulate procurement’s role, and share learning on how to facilitate broader considerations of value and impact.

Tune in next week for part 2.

(Editor's Note; And if you are interested in the link between behavioural economics / psychology and procurement negotiations, do download our paper here titled "Improve Your Procurement Negotiation Skills – Dr Daniel Kahneman and Behavioural Psychology Suggest Some Winning Techniques").

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