Daily Archives: October 6, 2008

Procurement Fundamentals — A Path to Innovation

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Every year, I look forward to going to conferences with the hope that I will get a chance to see a great deal of innovation and learn something new. Most years, I am largely disappointed. Is there innovation? Yes. But much of what is being presented relates to operational excellence, operational success or even operational “good-enough.”

Why is this? It’s a lot harder to innovate when you are still struggling to set up standard practices. Procurement systems and processes tend to be a patchwork of different approaches for different spend areas all jumbled together. Many organizations are just catching up to best practices. Let’s take the “101” starting point for any procurement organization, the basic spend analysis of vendor payments — understanding how much you are spending with each of your vendors. Recent surveys indicate that less than half of companies have a system for this. For those companies without a system, they seem to be doing ad hoc dumps of data from their AP system into Excel or a data warehouse with no consistency in the analysis. We all know this is not a best practice in procurement. If companies are not doing the basics well, they have little time to focus on innovation.

It’s not surprising that there are so many presentations about operational successes and so few about innovation at sourcing conferences. Operational success is a key element of a strong function and can deliver significant value, but should it be considered innovation? At a recent conference, I attended a wonderful presentation on Negotiation Fundamentals. One would think that everyone in a purchasing group would be well versed in this and applying the fundamentals regularly. But if you look around procurement organizations, you find that many people are not applying the core disciplines of procurement in effective ways.

Is there support for innovation at organizations? Successful companies are continually investing in innovation and developing new products and processes. These new products rarely just happen and not every new product idea is a success. This means that a procurement group interested in innovation should be doing three things:

1. Look for innovation. Innovation usually comes from new companies but it can also come from unexpected areas. But, in order to recognize it, you’ve got to be open to it. I remember when my grandmother came to visit us one summer from Germany. Like many older people she wasn’t open to trying new things. Her attitude was, “I don’t know that food, so I don’t want to try it,” or, “We have that at home too.” Because she wasn’t open to new things, she didn’t see anything new. She wrongly concluded at the end of her stay that food in America was just like Germany. Are you saying the same thing to innovation?

2. Invest in innovation. Is it 1% of your budget? 10%? Is it 5 projects? Is it 3 new vendors allowed in? Don’t know? If you don’t know, how are you making it happen?

3. Allow for “failure”. A group that is innovating is going to have failures, or “less-than-total” successes. But that’s okay if your environment rewards some risk taking. If not, your people will only attempt things they know will succeed — which is not innovating, it’s following. You need to be able to work on projects and initiatives that aren’t perfect. Success is usually the product of many such small failures. There are far too many projects / programs / implementations that are deemed too big to fail by the owners. Projects promising innovation in a company may get viewed as another procurement initiative ready to fail — over promising and under delivering. This atmosphere is rarely one that fosters innovation.

If you are already innovating — wonderful. But I suspect that most organizations would be delighted if Purchasing were to deliver better operational performance. If your organization is not ready for true innovation, perhaps focusing on operational success is the way to build your organization’s credibility. By demonstrating your ability to add value through the fundamentals, you are setting the stage for future innovation. When you do innovate, you can present it as delivering more of what the organization already values.