Strategic sourcing is all about finding the right solution. It’s never just about the costs
In the procurement of strategic IT contracts, such as new systems, new technology or consulting services, businesses often focus too much on prices and requirements, and not enough on business needs and value generation. Read about how we can equip you with a good foundation for “strategic sourcing.” We will also provide you with insight into the five most common pitfalls that businesses have to steer clear of in order to achieve greater success with strategic sourcing.
Strategic sourcing, which is also called strategic purchasing or procurement, is an important craft that seldom gets the attention it deserves. Businesses often look at purchasing, competitive bidding, and the dialogue with potential suppliers as difficult processes that interrupt the time schedule and as something that is mainly just about getting the best prices. The typical rationale sounds something like this: “Now that we have the prices from five different suppliers, we’re ready to make a choice.”
That approach couldn’t be further from what we recommend, that is, if you are interested in working strategically and getting the most value from your major, essential purchases.
Build a solid foundation. Get a handle on your business goals and value drivers
Strategic sourcing has to do with a lot more than just prices. Of course, prices should be in line with market conditions and the competitive environment, but what is more important is that throughout the purchasing process, you are able to identify the solution or the supplier that can enable your business or organization to realize value.
Before contacting potential suppliers, and before you decide whether you should issue a tender or just negotiate an agreement, it is essential that you have created clarity around the criteria of success for the strategic sourcing. You can start by finding the answers to questions like these: What is the value that this purchase will help generate? Which value drivers are essential to achieve this? Should the purchase help to ensure cost savings, minimize risks, or correct problems with the current suppliers or products?
To help you put into words the anticipated value generation and the goal of the purchase, we make use of six general sourcing drivers. They can be described in various terms, but they always fall within one or more of the following six categories – costs, terms, risk, flexibility, autonomy and quality.
Once you have established clarity around your shared goals and value drivers within the organization, the foundation is in place for a constructive dialogue with potential suppliers. In the end, this leads to a more qualified dialogue much higher quality.
Five common pitfalls relevant to strategic sourcing
Even with a solid foundation in place, there is a lot to be on the lookout for when you proceed to the next step and request proposals from potential suppliers. Based on our years of hands-on experience with strategic sourcing, we have put together six common pitfalls that businesses and organizations should watch for when it comes to sourcing.
Pitfall 1: Thinking in terms of requirements rather than needs
Usually, a number of requirements are communicated to potential suppliers, and then the purchaser evaluates them and determines which one best fulfills the requirements and terms of the bid. The big problem with requirements is still that they are either fulfilled, or not fulfilled, or partially fulfilled. With a lot of requirements, the suppliers naturally focus on fulfilling them.
The problem with this is that this robs the potential supplier of the opportunity to come up with good, creative suggestions for solutions that the purchaser may not have considered. My suggestion is that during the purchasing process, you make an effort to express as many of your requirements as possible in the form of needs and wishes. Needs and wishes can be fulfilled in many ways. This gives the suppliers the opportunity to show what they are capable of when they present their skills.
Note that there can and should be a few obligatory requirements that suppliers must meet. This helps you to screen out some of the suppliers, and that saves time for both the suppliers and the purchaser. Don’t hold back from setting a few requirements that are decisive in the process of selecting the right supplier or solution. An example of this could be that there must be qualified support in a certain language.
Pitfall 2: Forgetting to give a clear message about the required value generation
While it is instructive to describe what you would like to purchase, many forget to map it out completely and also communicate why. The why has to do with the business goals and value drivers. By being precise on these factors, and communicating them openly, it is possible to achieve internal alignment and also gives the suppliers the best chance of offering a solution that fulfill the most value for your business.
Here is a simplified example: There is a need for an IT system for tenders and order management. There will be a big difference between the solution and the approach, depending on whether the value driver has to do with “opportunity for growth outside of Denmark” or “converting more offers into orders” or that “we need to save 10% on sales without losing momentum.”
It is only by making business goals and the desired value generation explicit to potential suppliers that they will know what they should aim for. Anything less would be unfair to the suppliers, who often allocate a lot of resources into proposal preparation. Unsatisfactory bids waste time for the purchasing business or organization too.
“While it is instructive to describe what you would like to purchase, many forget to map it out completely and also communicate why
Pitfall 3: Forget to communicate in writing
The third pitfall is a continuation of the second one. It is fine, and is often a good idea, to have clarification meetings and a dialogue with potential suppliers in a competitive environment, but the needs and requirements must always be communicated in writing, so that everyone can compete along the same lines.
Writing good, precise summary reports of the meetings with suppliers is essential. Attention must be focused on any needs, wishes, or requirements that may need to be adjusted as a result of the dialogue or agreements with the individual supplier (including anything the supplier offers or guarantees as part of a potential agreement) as well as action points for both parties. Precise wording really matters.
It may sound trivial, but many businesses receive bids that seem random because they have communicated their needs and requirements differently at the different meetings. This is hard to correct afterwards, especially if there are not any summary reports from the meetings to refer to.
Pitfall 4: Inviting too many or too few offers
Many succumb to the temptation to request too many proposals from suppliers, just to be on the safe side, or because they think that they know the solution or the price beforehand.
In our experience, it is usually a better idea to invite three or four bids in order to ensure that there is enough time and resources to enter into the negotiation process with the individual bidders. At the same time, this gives you the opportunity to communicate with the potential suppliers that they are in competition with a select few. This exclusivity ensures high commitment and motivation from the supplier to produce a high-quality bid.
The suppliers should at all times feel that they:
- have a real chance of winning the contract and that they
- are in serious competition with the other suppliers.
Pitfall 5: Forget to create and maintain the competition along the way
A bid is a negotiation process. When everyone feels like there is something at stake, there is an increase in mental alertness and focus.
That is why it is important to create and maintain the competitive environment for as long as possible during the procurement process, which is something many businesses forget to do. It is perfectly fine to communicate that you are in negotiations with others, even late in the process. You can let them know by saying something like, “We have selected two companies for the final stage of negotiations, and you are one of them.” If you are not able to encourage and maintain the competition along the way, the supplier can become less willing to negotiate throughout the process. They should feel like they have something to win, and something to lose.
