Can We Be “Fair” In Procurement? It’s Not Easy!

The sixty-four million dollar question is this - what exactly is “fair”?

“Fairness” in procurement has come up recently in several concepts, from the discussion about major government contractors following the Carillion collapse, to talk about agency margins at ProcureCon Marketing. But there is little point agreeing that we want a supplier to make a “fair” return if we can’t agree what that is. How exactly do we define a fair return?

We might say that is comes down to return on capital - firms need to make an acceptable return on the money invested in the business, otherwise the owners of the capital will do something else with it. But in a low-interest environment, where alternative investments pay low returns, the return on capital of 10-15%, which most blue-chip firms make, might look on the high side. Is it fair to the buyers?

Or is fairness defined by profit margin? But then what is a fair margin? Some industries run quite happily on average bottom-line margins of 5%, trading businesses on 1% or less. In others, the expectation is for something much higher.

Let’s take WPP the world’s largest advertising firm as an example.  The firm had revenues of some £15 billion and made a profit of £1.9 billion last year – close to 13%.  So is that "fair"? Might I be going back to the WPP account manager and asking for some discounts if I was a buyer of their services?

Perhaps I might be even more mischievous and suggest that any firm who paid their CEO £70 million in 2015, £48 million in 2016 and a mere £14 million in 2017, as WPP did with Martin Sorrell, who recently moved on, is clearly making more money than it knows what to do with. So does executive reward play into the argument on fairness?  Should procurement people be challenging that in their negotiations?

And yet there is inconsistently there too. We tend to look at people who have built up private firms (such as Richard Branson at the Virgin Group) with admiration, and see their reward as well deserved, almost no matter how much it is. Yet Sorrell has been just as important in the development of WPP as Branson with Virgin. But because he took the firm public at an early stage, in order to facilitate the acquisitions that built the business, we think differently of his reward.

Fairness – not a good basis for supplier relationships

The subjectivity of the concept of 'fairness' is also clear from this discussion. Some readers will no doubt think Sorrell deserves every penny of his reward. Others may be horrified. Similarly, one category manager may feel a 10% margin for a good supplier is very fair - her successor may feel it is excessive and unreasonable.

Another weakness in the concept of fairness is that is fundamentally suggests a 'planned economy' approach to business. Maybe not the full Stalinist 5-year tractor production plan, but the idea that someone can sit outside a business and reasonably determine how much profit an organisation is allowed to make. We all know the past history of that sort of process, and it isn't exactly positive.

Of course, market intervention of this type does happen in certain industries now that are heavily regulated, but interestingly these are probably not examples anyone would quote as best practice in terms of service, innovation or dynamism.

We all know what we mean in broad conceptual terms when we wish for a fair return for our suppliers. But pointing out these difficulties shows that the assumption we can somehow objectively and scientifically define fairness, let alone translate it into a basis for doing business with suppliers, is wishful thinking. If you are in a powerful position in a market, or with particular suppliers, you may be able to impose a certain margin or return. That might even be the best route in certain very specific cases. But don't be fooled into thinking that the supplier or indeed an external observer will necessarily agree with your definition of fairness, or that the tactic will be appropriate in many cases.

Fairness is of course a useful concept to keep in mind when looking at strategic supplier relationships and to understand motivations at individual and business level. But it is little use when it comes to actually determining how much should be paid for particular goods or services. It is no substitute for much more powerful determinants in the world of economics and procurement - markets, competition, value and negotiation.

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