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Whether buying or selling, it’s a problem

Posted by Tim Cummins, President of IACCM, Professor, Leeds University School of Law; Chair, International Commercial & Contract Management | Jan 24, 2018 9:23:00 AM

Indirect procurement remains for many a problem child. It may have grown bigger, but has it grown up?

Research shows that services are now the dominant element in business-to- business trade, with the transition to ‘goods as a service’ continuing this shift, yet they often seem to be treated as the unwanted step-child.

Several times recently I’ve worked with IACCM members to review the maturity of their indirect procurement process. Almost without exception, they are struggling to measure value and to build strong supplier relationships. The main reason is that they are still using procedures, systems and contracting models that were developed to support direct procurement- and they simply don’t work.

Suppliers faced the pain

Many suppliers went through the pain of transitioning from a predominantly product-based to a service and solution-based model. It is a tough transition. The pricing models, contract terms, sales approach, monitoring systems, need for performance management, variability of costs … dozens of factors impose a need for fundamental reengineering of commercial and business operations.

What I find when I look at buying organizations is that the shift of volume from direct to indirect has been gradual and therefore often unplanned. Indirect procurement frequently remains a ‘bolt-on’ activity, deprived of the investment in systems and skills that it needs.

What’s the consequence?

Lack of focus means that opportunities are missed, costs are increased, value is eroded. To give a couple of examples:

  • A recent IACCM project for an organization in North America involved analysis of almost 10,000 contracts. It has unearthed a myriad of data, including the fact that well over 50% of their spend is indirect. Yet they have no contract templates for services and solutions; everything remains based on products and therefore contracts require extensive tailoring or, in many cases, an inappropriate contract is used. Soem terms simply make no sense; other key terms are omitted. Supplier complaints are ignored because procurement staff have never been trained to handle indirect agreements or relationships.
  • A capability assessment for a large international corporation revealed that the indirect team have no visibility to the overall acquisition process. Service levels and statements of work are produced by anyone who feels like producing them, without review. The underlying P2P system was set up for direct purchases and e-procurement, which simply does not work for many indirect acquisitions. The consequence is that there is essentially no visibility to performance data or costs – even though this corporation is in a highly margin-sensitive industry.

I am sure there are some organizations that have grasped the fundamental difference between direct and indirect. But based on the comments I hear from suppliers and the assessments that IACCM undertakes, they are relatively few and far between. It’s time this was changed. Procurement groups need to re-assess their priorities and recognise that in future indirect will be the dominant element in their work and potential value. That’s good news – because the automation of direct procurement means there will be a rapid drop in the number of people needed.

Topics: procurement, contracting excellence, contract management

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