Spending Our Own Money – Procurement As The Budget Holder

Procurement functions influence huge quantities of spend in most large organisations. But the discretionary budget of the CPO or equivalent is generally fairly insignificant compared to the wider influenced spend. But that is no reason why procurement should not apply all available skills to make sure the function is truly expert and high-performing in these spend categories that are directly under control. Indeed, we might assume that as much as anything, procurement would want to demonstrate to internal stakeholders how well we spend our own money!

The most significant of these categories is now technology in most cases. Consulting may have major spend peaks as well as troughs, recruitment, training, research - these can all be significant but most organisations will now have a regular and substantial spend on technology, ranging through spend analytics, eSourcing, purchase to pay, risk information and so on. Yet as my US colleague Pierre Mitchell has observed more than once, we often see procurement functions demonstrating approaches which are certainly not best practice in these close-to-home areas.

However, there are some inherent issues with technology that don't just apply to procurement but make procurement a challenge in many cases. One of these is supplier "lock-in".  If we look across spend categories, most will have some issues in terms of how easy it is to change suppliers. Even the “legendary” stationery category, always used when the simplest possible spend area is being discussed, can have its challenges. Some years ago, I remember a large public sector organisation ended up in the newspapers when the new stationery supplier failed to deliver critical forms to local offices.

But it is fair to say that changing ERP system providers for example or even a purchase-to-pay subset of that is a far from trivial matter. Spend analytics may not be quite so challenging; but if your incumbent has all your historical data, knows how your organisation works and so on, there may still be quite a switching cost. eSourcing again may not seem too much of a problem – but all those staff who need to learn how to use a new platform?

This came to mind in part after reading the results (a “Pre Close Trading Update”) announced by eInvoicing firm Tungsten recently. Tungsten took over the well-established OB10 eInvoicing business in 2013, and is looking to add both spend analytics and more significantly, supply chain finance to that base. Recently, the firm has been looking to re-negotiate deals with core eInvoicing climates, and in the press release they said this:

“Tungsten completed contract renegotiations with 34 buyers in FY16, agreeing weighted average price increases of 64% on a like-for-like basis… A further eight buyer contracts were due for renegotiation in FY16 of which we have agreed commercial terms on five at similar price increases. We remain in discussions on the remaining three.  

Due to legacy contractual restrictions we were unable to renegotiate pricing with an additional 10 buyers who had their current contracts extended. We are in discussions with each of these to agree new terms when the extended contracts expire”.

Now as an investor, you would see this as good news. That’s why Tungsten is talking about it. But as the Procurement or Finance Executive with these costs in your budget, you may feel less happy. 64% price increases? Now being fair to Tungsten, the firm has been operating eInvoicing services unprofitably and that has to change. As a customer, you want your suppliers to be working on a financially sustainable basis, so it may be that the discussions on pricing have been very amicable. However, eInvoicing is one of those areas where switching technology providers would appear to be quite a burden, so clients may feel nervous about the strength of their own negotiating position if further increases were to be sought.

How can procurement make the cost of switching lower in terms of procurement technology? Even if you choose not to switch, having a stronger BATNA (best alternative to a negotiated agreement) will help in negotiations with incumbents. So in part 2 we will look at some techniques that might be useful and enhance your negotiating position in this tricky situations.

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