Daily Archives: March 14, 2013

Adoption a Problem? Incentives are the Answer!

Just make sure they are the right incentives.

As per this article by Mitch Free on Forbes.com on the Best Advice a CEO Ever Received, your incentive plan works. You will get the results you incentivize, so be careful of and monitor for unintended consequences.

As per the article, Mr. Free couldn’t understand why, when he took his car in for a wash, the attendant was so insistent in fixing a “pitting” on his windshield that he couldn’t see that the attendant even offered to do the fix for the same price as the wash and give the wash for free, which did not make much sense. So Mr. Free emailed the owner, who stated that he was paying a $5 commission on window repair sales, and none on car washes, in an effort to increase window repair sales and that Mr. Free’s e-mail explained why there was a big spike in people getting their windshields’ fixed but not getting their car washed. It was an unintended consequence of the incentive plan.

The same holds true where Supply Management software is concerned. Adoption will depend on the incentive plan. A proper incentive plan will go a long way to getting utilization, but an improper one will go even further to jeopardizing your supply management returns. For example, if you made a worker’s bonus contingent on using the new e-Procurement system, and then calculated a certain percentage of his bonus based upon total spend put through the system, you might find that, at the end of the year, that worker put as much spend as he possibly could through the system. And while you might think this is the intended consequence, you might also find that spending overall on indirect categories such as office supplies, computer and electronics equipment, and temp services increased 10% year over year. Why? Instead of doing quick RFXs and then negotiating bulk purchases with the lowest bidder, the buyer bought everything he could through the vendors already integrated (via EDI, punch-out, etc.) with the e-Procurement system, even though most of the purchases were for off-contract items that were, on average, 10% higher than rates that could have been obtained with a new sourcing contract with another vendor.

In this scenario, the right incentive plan would be to incentivize buyers on achieved year-over year savings on spend under management, where spend under management is that spend that is negotiated or managed through a supply management system, whether it is the e-Procurement system, the e-Sourcing system, or the Contract Management system. This way, the system will be used when it’s appropriate, and the buyer is only rewarded when savings are achieved.