It’s interesting that there is this assumption that suppliers are entitled to determine who it is that you negotiate with on their side.
Sure, there is the exception that procurement may insist on a certain level of employee that is sufficiently authorized.
So instead of the Regional Director of Sales, perhaps the Western Region Sales VP or higher is insisted upon.
But this begs the question, why is it that suppliers always send someone in the sales chain to negotiate with procurement anyways?
And if not salespeople, then it’s “Business Development Managers” or “Account Managers” or the like, whose job responsibilities are suspiciously similar to that of sales employees.
In fact, they are sales employees.
But back to the question, why is it always salespeople that suppliers send our way for negotiations?
The answer is: because that’s what’s most profitable for the supplier to do. They send someone who understands the limits on price and profitability.
The next question is, why is procurement ok with this?
You may be wondering “why shouldn’t we be ok with it?”.
The reason you shouldn’t be ok with it is it’s one of the biggest mistakes our entire profession is making.
What’s the mistake? I want to scream this from rooftops: ***You are negotiating with someone who is authorized to negotiate price, but not authorized or equipped to negotiate cost.***
You’ll never get real savings with them, because all you are negotiating is profit margin, which is only a tiny part of the overall cost picture.
My organization has determined through our research and practice that on average, 18% cost savings opportunity exist in the cost streamlining of end user demand.
Meaning, end users don’t know how to develop their demand (Specs/SOWs) in a cost-effective fashion.
In order to unearth these savings, there are many internal steps that need to be taken, which I won’t get into in this blog. But I will get into external steps.
You need to be receiving not a lump sum quote, but a line item quote, with all cost categories broken out, arranged from most to least expensive. Make the supplier do that.
Then, for the biggest cost categories, you want someone in the negotiation room from the supplier who is responsible for that.
If a particular raw material is driving the cost, you want the supplier engineer who is responsible for that aspect of the design. Maybe they can offer alternative specs or materials.
If shipping is a big cost driver, you want someone from logistics.
If a custom component is a driver, you want your own internal design engineer and their manufacturing engineers in the room. Maybe there’s a way to shift from custom to standard components.
And so on.
I already know you’re not getting 18% cost savings on average in hammering suppliers for a better price, so stop limiting yourself to low return strategies.
CPOs, you need to be instilling this in your organizations. That’s how the procurement function can become a source of enterprise advantage.
Now go off and do something wonderful.
Be your best!
— Omid G. “THE Godfather of Negotiation Planning” ~ Intel Corp
www.PSCMinstitute.com
P.S. Dozens of the Fortune 500 have collaborated with us to elevate procurement department capability with strategies like this, helping them shift from cost center status to driving advanced procurement and negotiation strategies that have them recognized as a Value Added Center of Profit. Contact our office at Support@PurchasingAdvantage.com to set up a 1/2 hour discussion with one of our client advocates to find out more.
As a veteran observer of the procurement technology landscape for three decades, I’ve witnessed numerous waves of innovation sweep through the industry. The advent of AI is perhaps the biggest yet, and changes everything for what is possible in the procurement space. The recent Forrester Wave™ report on Supplier Value Management (SVM) Platforms for Q3 2024 captures the changes in this landscape that all CPOs need to be aware of and leverage as a part of their transformation agenda.
The Evolution of SVM: More Than Just Cost Savings
Before diving into the vendor landscape, it’s crucial to understand how the SVM space itself has evolved. According to Forrester’s report, SVM has transcended its traditional role of cost-cutting. Today’s SVM platforms are expected to enhance the purchasing process, optimize supplier management, drive sustainability, and transform procurement roles to ensure successful business outcomes.
This shift reflects a broader trend in business: procurement is no longer just a back-office function but a strategic contributor to organizational success that aspires to be a profit center for the organization at large. As Forrester notes, “Organizations now integrate sourcing and procurement with their strategic vision at the highest levels, making SVM technology a must-have alongside CRM, enterprise resource planning (ERP), and human capital management (HCM).”
The Changing of the Guard: New Leaders Emerge
The Forrester Wave report has revealed a reshuffling of the deck in the SVM space. Traditional heavyweights are finding themselves in unfamiliar territory, while innovative players are surging to the forefront. The secret sauce and main differentiator seems to be how well AI capability is harnessed to enable SVM success for the enterprise.
The New Top Trio: Zycus, Coupa, and Ivalua
The Forrester Wave report highlights a new triumvirate at the forefront of the SVM space: Zycus, Coupa, and Ivalua. Each of these vendors brings unique strengths to the table, reshaping the competitive landscape.
The report really paints Zycus ahead of the pack, and it’s clear that their leadership position lies in their headway in innovation, and particularly in the realm of artificial intelligence. The Merlin AI suite, was launched in 2019, long before the AI hype began. Merlin AI, which is now powered by Open AI (Generative AI), is touted by the report as pushing the boundaries of what’s possible in business spend management. Zycus interestingly is the first amongst equals on the horizontal axis of the Forrester Wave, indicating a strong position in terms of strategy and innovation. Its forward-thinking approach and investments in cutting-edge technologies have positioned it as a visionary in the leader’s space.
Coupa has been a long-standing leader, maintains its strong position with its comprehensive platform and focus on user adoption. However, they have experienced a precipitous fall in rankings and performance since the 2022 Forrester Wave report, indicating perhaps greater focus and innovation needed in the AI and SVM space. Yet, the company’s emphasis on community intelligence and spend optimization continues to resonate with many enterprises.
Ivalua rounds out the top three with its flexible and scalable solution suite. The company’s strength lies in its ability to cater to organizations which require highly customized deployments and have the patience with the longer implementation timelines that such customizations require.
While all three vendors demonstrate solid capability and leadership, it’s clear from the report that Zycus’s momentum in innovation and AI is what gave them their pole position ranking in this analysis.
Legacy Players: Adapting to New Realities
Interestingly, some of the industry’s long-standing giants like SAP Ariba and Oracle have found themselves edged out in the ‘Contender’ category. This shift speaks volumes about the pace of innovation in the SVM space and the changing priorities of procurement leaders. Possibly, these IT behemoths are strongly focused on their core business of ERP solutions and SVM remains as an afterthought in their strategy. However, it’s worth noting that these companies still have a significant market presence, and their market position could change over time.
The AI Revolution: More Than Just a Buzzword
Artificial Intelligence isn’t just a feature anymore; it’s the cornerstone of modern SVM platforms. AI capabilities need to be seamlessly integrated across the entire SVM suite. From automating routine tasks to providing predictive analytics, AI is redefining what’s possible in procurement. While AI is crucial, the human element remains irreplaceable. The most successful SVM platforms strike a delicate balance between cutting-edge technology and user-friendly interfaces. In reading the report, Zycus’s Merlin AI capabilities seem to best embody these enterprise capabilities that CPOs need for their procurement transformation agenda.
Customer-Centricity: More Than Just Lip Service
In my conversations with CPOs around the world, one theme consistently emerges: they want a technology partner, not just a vendor. The Forrester Wave report seems to echo this sentiment, with customer satisfaction playing a crucial role in the rankings. While analyst reports are invaluable, nothing speaks louder than customer feedback. The report highlights positive customer feedback for several vendors, underscoring the importance of real-world value delivery.
Gartner’s Magic Quadrant: The Next Bold Step?
Gartner’s Magic Quadrant for Strategic Sourcing Application Suites has long been a cornerstone of procurement technology evaluation. Last year, Gartner took a courageous step by streamlining their leadership quadrant, which had previously been crowded with five vendors. This bold move saw several long-standing players relegated to lower quadrants; a shift now mirrored in Forrester’s recent Wave report. It was a commendable effort to realign their analysis with the rapidly evolving SVM landscape.
However, the industry doesn’t stand still. The question now on everyone’s lips is: What’s next for Gartner’s Magic Quadrant?
Having spoken with dozens of CPOs in the wake of the Forrester Wave report, there seems to be a growing consensus that the next logical step is recognizing the new leaders who are shaping the future of SVM. Particularly, there’s considerable buzz around Zycus’s position. Many industry insiders are wondering if keeping Zycus out of the leadership quadrant truly reflects the current state of the market.
As someone who has closely followed both Gartner and Forrester over the years, I’ve noticed that Forrester often serves as a leading indicator of market shifts. Their willingness to shake up the status quo in this latest Wave report suggests that we may be on the cusp of a broader industry reassessment.
Gartner now faces a challenging decision. On one hand, they’ve shown they’re not afraid to shake things up, as evidenced by last year’s restructuring. On the other hand, elevating new leaders to the top quadrant is no small feat, especially when considering the potential pushback from established players with significant legacy presence and formidable marketing budgets.
The key question is: Will Gartner continue the trajectory they started last year? Will they take the next bold step in reshaping their Magic Quadrant to reflect the new order in SVM?
It’s a delicate balancing act. Gartner must weigh market realities, customer feedback, and vendor capabilities while maintaining the integrity and relevance of their analysis. As an industry observer, I’m keenly awaiting their next move. Will they bite the bullet and potentially ruffle more feathers? Or will they take a more conservative approach?
One thing is clear: the SVM market is watching closely. Gartner’s next Magic Quadrant could either confirm the shifting tides indicated by Forrester’s Wave, or it could present a contrasting view that would certainly spark intense debate in procurement circles.
As we await Gartner’s next publication, one can’t help but wonder: Is there more than meets the eye in their evaluation process? Or are we on the cusp of witnessing another bold step in creating a new order in the SVM space?
Whatever the outcome, it’s an exciting time for the SVM market. These analyst reports, with their agreements and disagreements, ultimately drive the industry forward, pushing vendors to innovate and improve. And in the end, that’s a win for procurement professionals everywhere.
Looking Ahead: The Future of SVM
As we look to the future, several trends are clear:
AI and machine learning will continue to be major differentiators
Integration and unified platforms will become the norm, not the exception
Cloud-native solutions will dominate the landscape
Customer-centricity and ease of use will be key decision factors
Sustainability and supply chain resilience will be increasingly important
A Word to the Wise
For CPOs and procurement leaders evaluating SVM solutions, my advice is clear: don’t be swayed by past reputations alone. The market is evolving rapidly, and yesterday’s leaders may not be equipped to solve tomorrow’s challenges. Look for vendors that are investing heavily in innovation, particularly in AI and cloud technologies, while also delivering on the fundamentals of usability and integration. Remember, with SVM, you are not looking for a quick fix for today’s problems; you are paving way for competitive advantage at least for the next decade.
The Bottom Line
The latest Forrester Wave report isn’t just another analyst evaluation; it’s a wake-up call for the entire industry. We’re entering a new era of Supplier Value Management, one where innovation, integration, and customer-centricity reign supreme. Vendors that have positioned themselves at the forefront of these trends are poised for continued success.
As for other industry analysts, including Gartner, the writing is on the wall. The market has spoken, and it’s time for evaluations to reflect the new reality of the SVM landscape. The leaders of tomorrow are already here today, and they’re reshaping the future of procurement technology.
In this dynamic environment, one thing is certain: the only constant is change. And those who embrace it will be the ones who thrive in the new world of Supplier Value Management, navigating the journey to transform the procurement function into a value-added center of profit for the enterprise.
Your enemy in negotiations is not who you think it is. They don’t sit on the other side of the table.
Your enemy is within. Almost all external negotiations fail because of internal negotiation failure.
Negotiations do not start when you engage suppliers in potential purchase talks. They start when your end user engages you in potential purchase talks.
So, is your end user the enemy? Not hardly. The design of the SOW or spec is your enemy. And we pay so little attention to it.
You’re waiting, ever impatiently, for the end user to give you the finalized spec or SOW, so you can run with it.
But do you ever stop and ask them how they came up with it? Or shift the focus from what they are trying to buy over to what they are trying to accomplish?
Read this twice: You must always ask and understand how the end user came up with the product or service design.
If the answer is that some person or some team internally came up with it, then you know there will be problems.
Why? Because that’s code for “we’re the first people on the planet earth to ever try out this idea, and we hope it works”.
Custom solutions are overrated. Highly overrated. In every aspect of life. There are no exceptions.
They’re overrated because you’ll be the first customer ever to try out the idea. You’ll also be the first person ever to find out all the mistakes in the design. And it will also cost a lot more than something that was a standard solution.
Standard solutions are underrated. Highly underrated. In every aspect of life. There are no exceptions.
The person with the custom home had their home completed later than they expected, it costed more than expected (and WAY more than standard designs), and they won’t learn all the things they don’t like about the house until the money leaves their account and they move in. Living in a custom house is totally different than looking at it on a piece of paper.
The iconic Concorde passenger airline jet was over twice as fast as any modern day commercial airline plane but had serious cost (and other) problems. Only the rich and famous could afford it.
And it was 100% custom designed from scratch. The enemy of procurement.
And now, the fastest passenger jet plane in the world hasn’t flown a single flight in over 20 years.
Enter Boom, the supersonic jet company that you’ll start hearing a lot more about soon. They’ll replicate the Concorde’s capabilities without the environmental impacts or the financial constraints.
The Boom-Overture will fly from New York to London in the same amount of time as the Concorde but will cost 75% less per ticket (adjusted for inflation).
The development costs for the Boom-Overture will also be far less than for other planes. Two recent clean sheet designs in aviation were the A380 and the 787. The A380 cost about (USD) $25B and the 787 cost over $30B.
The Boom-Overture plane design and development is costing only $6B, and NONE of this savings is coming from procurement deftly hammering suppliers in negotiations.
So if procurement is not achieving these billions of dollars in savings, enabling supersonic travel for 75% less cost, who is?
Answer: it’s the end users. They swallowed their ego and are reusing designs and components.
For instance, the landing gear is reused from the F16 landing gear. It’s proven, it’s already designed, it’s already in use, the molds are already in place, the design costs are already spent, and so on.
In every instance possible, they are reusing existing designs or modifying existing designs – turning a stool into a chair, working off of existing technology.
Standardization is the key to success in procurement. Customization is the enemy. The enemy within.
So what does this mean to procurement? It means that negotiations to achieve cost savings start with the business units and not with suppliers.
By the time an ill-conceived design makes its way to your suppliers, there is nothing the supplier has in their bag of tricks to undo this issue. All they can do is offer to make a little less profit per unit if you buy more of this bad design.
Spread your wings and recognize that your biggest savings opportunities are internal and not with suppliers. Expand your scope. Expand your influence. Expand your skills.
Now go off and do something wonderful. Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. if you would like to have an internal evaluation done of your organizational negotiation capability, with follow on customized training to elevate capability, we are the global leaders. We’ll put your org on track for 5-10% sustained higher savings across the board after our collaboration is over. Contact my office at support@purchasingadvantage.com to find out more.
There’s a problem in procurement. The wrong people are getting recognized.
Sure, there’s the people who are nailing their results and moving mountains. They’re getting promotions and pay raises, which they should.
But then ask yourself, who are the people who are viewed as being veterans. Savvy. Able to tackle the toughest situations. The ones that solve problems. The worst problems. The “stop everything” problems. You know who these people are. Get out of their way, because they’ll solve the problem. We’ll call them the Fixers.
But before we take that further, let’s talk about who these people are *not*.
They are not the people who quietly just get things done. The ones who run smooth ships, hit and exceed their metrics, have high performing teams, and operate with a pretty much “no excursions” sort of business model. Things just work. Their management update presentations go smooth and quick – if they do them at all. We’ll call these the Executors. They execute to a tight business model, efficiently and effectively. No fuss, no drama, no excursions.
Now back to the Fixers. Do you know what else characterizes them? The Fixers are so good at putting out fires because they’re the ones starting them, or they allowed the fires to start on their watch – same thing.
The Fixers are visible, because problems are visible. If there’s a fire, they’ll put it out. And that’s what they’re getting awards, and formal and informal recognition for – their ability to put out fires. But is this what we really want in our profession?
Or do we want someone who prevents fires? It’s kind of like football, with the cornerback position. The BEST cornerbacks of all don’t really have any flashy statistics, because they are so good that opposing quarterbacks don’t throw their direction to begin with. They are Executors. There’s no pass to breakup or intercept, because the ball was never thrown their way. They’re that good. They prevent issues from ever arising.
In the United States, we value Smokey the Bear – the cartoon bear who teaches children and adults in TV commercials to focus on *preventing * fires. We need to value this in procurement as well.
We need to be building organizations that value people who know how to drive preventative practices in procurement, because the sad, painful truth is that procurement professionals are spending 70-90% of everyday in unplanned activities, largely driven by firefighting. Firefighting by smart, capable, procurement professionals that haven’t stepped back to realize that they’re focusing on addressing symptoms instead of root cause.
There was a high speed rail project in the United States that was budgeted at $34B. $11B was spent and it was found out to require another $100B to finish, and with a shorter route than originally planned no less. And do you know who was the hero who came in and put the fire out – cancelling the project – and received all the accolades for putting this hot mess to bed? That’s right, the same person who sanctioned the project’s funding up front to begin with. Nobody really made the connection.
This happens in procurement all day long.
Meanwhile, the Executors fall into a state of misperception. People – peers and management alike – think that the reason this person’s job goes so smoothly, with so few excursions, is because they have an easy scope. An easy job. Their suppliers are easy. Their commodity area is easy. The space they operate in is easy. Rarely is any of that true. Proper planning and foundation building results in low maintenance execution. It doesn’t mean it was easy. It just means it was executed right.
We should be elevating the Executors. But the organization still needs Fixers, because problems arise and capable people are needed to put them out. They just can’t be starting the fires too.
For every excursion – or fire – that arises, peel the layers of the onion and ask yourself “why?”. Was the contract put in place for goods & services instead of performance results? Was the sourcing model flawed? Was there overreliance on certain suppliers? Was the product design off? Was something left out of the SOW or Spec? Was the wrong supplier selected? What is the true ROOT CAUSE – at the center of the onion -of what happened?
And do you know what happens if the Fixer address the problem? They usually just address the symptom. That’s right, and the root cause will still be in place, dancing away. And as sure as the sun will rise, that same fire will take off again soon, because the root cause was never addressed. So if we’re going to have Fixers, they need to know how to solve problems ONCE. And once they solve that problem, the right controls need to be put in place to ensure non-recurrence. Now THAT’s a valuable Fixer.
But let’s give those quiet Executors some recognition. They’re the ones that truly make procurement go.
Now go off and do something wonderful. Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. The CPSCM™ Certification System, which has had almost 50% of the Fortune 100 send employees through it, gives you the deep dive on how to drive preventative procurement practices – ensuring SOW/Specs, contracts, negotiations, and most importantly, supplier performance results all are focused on prevention of excursions and delivery of results. And our clients tell us that the 70-90% of time that they were spending on unplanned activities – firefighting – reduces to closer to 20% after learning and implementing our proprietary methodologies. Contact us at support@purchasingadvantage.com to find out more today about getting your organization certified through our online program or through in-house capability building.
We are now down to the 3rd Procurement Contract Deadly Sin. And it’s the deadliest of them all. If you did not read the prior 2 deadly sins, these all feed upon each other. Here are links to the other 2:
This 3rd Procurement Contract Deadly Sin is also the most commonplace. Everyone is committing this sin, and everyone is suffering from it. Worse yet, nobody is talking about it.
This deadly sin makes you spend 70-90% of every day in unproductive fire fighting activities. In unplanned activities. In activities that become the highest priority, but don’t contribute anything to your career, income, or job results.
The final Procurement Contract Deadly Sin is this: writing of contracts for goods and services, instead of for *PERFORMANCE RESULTS*.
Let’s follow this painful flow:
The end user asks for goods and services.
You solicit or tender for goods and services.
You negotiate for goods and services.
You contract for goods and services.
You receive goods and services.
Your end user complains, not about goods and services, but about PERFORMANCE RESULTS.
Since the contract was written for goods and services, you have no recourse and no remedies, because you got exactly what you contracted for. It just wasn’t what the end user actually needed.
You now have to spend your time fire fighting solutions because your end user is unhappy, your suppliers are confused, and the contract you wrote is useless to help resolve. And somehow it’s all procurement’s fault.
Sound familiar? What would you say if I told you the Fortune 100 is absolutely struggling with this? How about if I said the Fortune 500? The Fortune 1,000? Keep going.
The procurement profession is struggling with this issue, from top to bottom, in every industry, in every country, at every level.
Is that bad enough for you?
And what is being done about it? Answer: absolutely nothing. The contract templates are for goods and services and the lawyers don’t have it as a part of their scope to address this.
The net result is frustrated end users, frustrated suppliers, and exasperated procurement professionals that are full time fire fighters, against their will.
The answer is to rearchitect the entire procurement process so that end user demand is articulated in the form of performance results, performance results are solicited and negotiated for, and performance results are contracted for.
And guess what happens next? You guessed right: Performance Results are received.
No more frustrated end users. No more frustrated suppliers. No more full time fire fighter roles for procurement. Much more free time on your schedule.
This is not just a theoretical panacea – we’ve taken over a hundred companies down this path and helped them transform. Not a single one has looked back. It’s the only way to go. And with all those employees no longer spending 70-90% of every day in wasted activities, productivity levels have gone through the roof. And they actually have time to work on strategy.
If you aren’t working on this transformation, then you are a slave to this profession. It needs to be your #1 focus as a procurement leader.
Now go off and do something wonderful.
Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. The CPSCM™ IS THE ONLY certification program on earth that does a deep dive on this contract transformation that we just covered. Omid G is your private instructor for 32 very dense and fast paced hours – see the materials and hear his voice throughout – online and on demand! Learn these skills to put your career and departmental results on the fast track for success. Contact my office at support@PurchasingAdvantage.com for a free demo for your department or to discuss in-house Procurement & Negotiation Capability Building efforts for your team.
If you missed Part 1 of this series, go here: https://pscminstitute.com/the-3-procurement-contract-deadly-sins-part-1/
Procurement pros in my experience tend to not like 2 things, pretty consistently: cost models and contracts.
They would prefer that finance leads cost modeling efforts and legal leads contract negotiation efforts – the remaining Ts and Cs after price, warranty, inventory model, leadtime, etc have been negotiated.
It’s unfortunate, and it leads to the 2nd Deadly Sin of Procurement Contracts: Letting the lawyers negotiate the contract Ts & Cs.
You may be thinking “who else would negotiate the contract Ts and Cs after I’ve negotiated all the commercial terms?”
The problem is, if you read the first part of this blog series (if you didn’t, stop now and go read it – these issues are highly interrelated), by saving the Ts and C’s for last, the supplier’s legal team will mark up your contract to death.
What happens next is you throw the contract over the fence to the legal department, who is already swamped and doesn’t share your urgency. The legal department is where contracts go to die.
What you wanted to have happen in days now takes weeks. Waiting for legal to get to your contract, and even then, waiting for them to finalize review and then the back and forth with the supplier’s legal. It’s endless.
So what’s the problem? The problem is not only that you allowed the supplier to markup the contract (see Deadly Sin #1), but also that you’ve shifted much of your accountability to the legal department.
Read this Twice: The biggest fallacy in contract review processes is that procurement pros assume that if a lawyer approves a contract, it’s a good deal for the business.
Nothing could be more wrong.
When a lawyer approves a contract, it means that the legal risks are sufficiently mitigated. Lawyers are looking at limitation of liability, intellectual property, insurance, damages, and other related terms.
What they are NOT saying is that the contract is a good deal for the business. Lawyers are not trained on assessing if a contract is a good deal for the business.
Think about it this way, how many times have you had a contract approved by the legal department for which the wheels later came off the bus in terms of supplier performance?
The Answer: Endless times. All the time. Too many times to count.
Another question: how many times have you actually ended up needing the intellectual property clause? Or the limitation of liability clause? Or the damages clause?
The Answer: usually not once in a 30 year career.
What does all this tell you? Lawyers are only assessing a PARTIAL ASPECT of the contract. They’re looking at legal risks. They have no clue if the contract is a good deal for the business.
What the lawyers are putting in place is seat belts and air bags. You put on your seat belt 100,000 times just in case something happens once. And decades go by without you needing them.
What the lawyers focus on is the same. It’s extremely important, but it’s rarely needed.
So, what this means is that you need to be a lot better at not only preventing supplier markups, but also ensuring that you have full responsibility for ALL the contract terms outside of the ones referenced above that the legal department is looking at.
Are you doing that today?
And when you do these things, what you send over the legal department is a much lighter marked up document, if at all. They get to the contract faster and the contract is a better deal for the business.
What needs to be put in place is an SLA (Service Level Agreement) with the legal department, outlining what clauses the procurement department is authorized to negotiate.
In addition, there can also be some legal provisions that are allowed to be negotiated absent the legal department involvement, subject to certain guardrails.
For instance, perhaps for all but direct materials and manufacturing capital equipment, procurement is allowed to negotiate limitation of liability to 3X the contract value with any supplier. That’s a big time saver.
In return for receiving contracts with lighter review requirements, the legal department should now agree to a more aggressive turnaround time. Maybe 1 week for each contract.
Then they should also agree to 1 or 2 “hot contracts” per quarter. This means a contract that they agree to turn in 48 hours, for instance.
Do these things, and you’ll have better results, faster results, a more comprehensive contract review process, and a better partnership with the legal department.
But there’s a big gap still. The biggest gap of all. Stay tuned for Deadly Procurement Contract Sin #3.
Now go off and do something wonderful.
Be your best!
Omid G
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. If you want to elevate the capabilities of your procurement department, making Negotiation a Corporate Capability, contact my office to discuss our Capability Building programs – they are much different than training, and with greater and more sustained economic results.
Procurement has some pretty bad habits with their contracts. Most of them are results killers and career killers actually, and people aren’t even aware of it.
Let’s go through the Procurement Contract Deadly Sins, one at a time. This blog will focus just on the first one:
Procurement Contract Deadly Sin #1 – Leaving Contract Ts & Cs for Last in Negotiations
It’s the standard protocol. First price, warranty, leadtime, inventory models, etc get negotiated, and then the Ts and Cs are left for last.
It’s kind of like how kids leave their vegetables for last when eating dinner, hoping to get out of it altogether.
The problem this creates is a large one.
Read this twice: The minute you have agreed on price, all leverage shifts from you to the supplier. And they love you for it.
The supplier knows they have your business now, and they know your bag of tricks is empty. You’ve already put the ring on their finger. You’ve already walked up to the alter with them. It’s over.
And guess what the supplier is going to do next? That’s right, they will pull out their red pen and mark up your contract to death, with whatever revised language they please.
Why? Because they can. Because you’ve incentivized them to. Because you introduced the contract AFTER you lost negotiating leverage.
Ts and Cs should always be negotiated before price – or worst case, concurrent with price.
Or if doing a bid, you can send out your contract out with the bid, along with language stating that “by responding to this bid, you are agreeing to be bound by the attached terms and conditions.”
Always know where the bargaining power levers are in negotiation.
Always make your contract negotiation moves before you put the ring on their finger.
Always drive your biggest requirements in advance of or in concurrence with price negotiations.
Achieve everything you need to achieve before the supplier has your money, or feels like they have your money. The day before a supplier has your money and the day after are two very different days.
Next time we’re going to talk about Procurement Contract Deadly Sin #2. Don’t miss it.
Now go off and do something wonderful. Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. We do a deep dive in contract management in a way that you’ve never learned before in our CPSCM™ Certification Program. It’s a game changer. 100% online, 100% on demand, 100% loved by almost half of the Fortune 100 who’ve benefited from it. Come join the best in the world today.
I just finished reading a Big 4 consulting report on Procurement Organization Performance, based on surveys from a range of Chief Procurement Officers in different industries and countries.
One of the 6 drivers used to measure Procurement department success was “Customer Satisfaction”.
“Customer” was defined as the people inside of the business units who were driving/funding the purchases.
I cringe every time I hear or read about Procurement’s Customers. It seems our whole profession gets this wrong. I guess the Big 4 aren’t immune. In fact, it’s the source of many problems too.
Here’s my big, bold, rock-hard position: *No Procurement analysis should ever be done using ‘Customer satisfaction’ as a criteria.* Period.
The reasons for this will be outlined below, but there basically two of them:
Reason #1 – Customers are not who you think they are in Procurement.
Who are the Customers of Procurement? It’s not the people who are asking you to buy something, that’s for sure. Who are they then?
The REAL Customers of Procurement are the Board of Directors (BOD) and, if a public company, the stockholders.
The people who are asking you to buy goods and services are not Customers.
Some companies call them stakeholders, but that’s too broad. Endless groups inside the company are stakeholders for every major purchase.
The people who generate the purchase demand and want it fulfilled are END USERS. That’s what they are. They will end up using whatever it is they are asking you to buy. Or in some cases, they represent the End Users, such as with a facilities manager.
Once you recognize this difference, then it’s clear that both parties, Procurement and the End User, should have allegiance to the actual Customer – the BOD and Stockholders. Their collective decision making should reflect this allegiance.
Reason #2 – End User Satisfaction is the Wrong Metric
So if Procurement is now correctly calling Customers (the business units) End Users, that only solves part of the problem.
The next part of the problem is that End User Satisfaction is the wrong thing to measure.
First remember that it is the BOD and the Stockholders we are trying to delight. And we delight them by doing things that are in the best interest of the company.
Therein lies the problem. If Procurement success is judged in part by their ability to achieve End User satisfaction instead of Customer (BOD & Stockholder) satisfaction, the wrong things will be measured.
Why is this? Here’s what makes End Users satisfied:
Buying things very, very quickly, with near zero disruptions.
Using the exact supplier the End User wants
Having goods and services expedited, with corresponding charges approved.
Avoiding bidding processes
Avoiding lengthy negotiations
Avoiding time consuming market analysis
Not pursuing alternative solutions/materials/designs
Not challenging any aspect of End User demand architecture
Above all, being an extremely seamless and fast processor of End User requirements/decisions
Do any of these sound like things that make the BOD and stockholders delighted? In fact, when these things are done, endless post-contract issues arise. Further, all of these are contrary to BOD and stockholder interests, and therein lies the problem.
There does indeed need to be some sort of feedback loop from the End Users back to Procurement, and that should indeed be measured.
However, that metric should measure different things.
Ask yourself how much time you spend thinking about the payroll department at your company. And then the accounting department. Facilities. Human Resources. Benefits. Security. How much time do you spend thinking about these departments?
The answer hopefully is ‘none’ or ‘zero’. If you were thinking about payroll continuously, that could only mean that something was wrong with the payroll function, and probably your paychecks.
Or if you are constantly thinking about the compressor in your refrigerator, it can only mean there is something wrong with it. The ideal circumstance is your refrigerator always works, and you are able to focus on more important things.
And so the success of a support function should be judged by how little – or how much – time you have to spend thinking about it.
And so End Users should be asked about their experience with Procurement, but just perhaps, their level of indifference may be a very positive thing.
IF Procurement “just works” and End Users are able to spend nearly 100% of their time on their day jobs, absent the normal deluge of post-contract supplier excursions, then their response may be the same as it would be for the payroll function. Or accounting. Or facilities.
Chief Procurement Officers, if you’re going to measure the success of your departments, measure the right things from the right people. And above all, don’t ask the wrong people the wrong things, like what I saw in this highly publicized survey.
Now go off and do something wonderful. Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. The CPSCM™ Certification Program puts laser focus on driving end user alignment with procurement strategy – not because they have to, but because they want to, because the value drivers are completely different than how traditional procurement is done today. Come join the CPSCM™ family and find out the secret sauce for putting your career on the CPO Fast Track for Success. www.PSCMinstitute.com
Let’s not talk about why procurement doesn’t have a seat at the table. I want to talk about why procurement is on the menu for lunch.
CEOs in the end distill simple messages from big complex sets of data. One thing they really pay attention to is whether your department is a Cost Center or a Revenue Center. It’s really simple to them.
HR. Legal. Payroll. Accounting. IT. Facilities Management. PR. And, yes, PROCUREMENT. All of these are viewed as cost centers. Being perceived as a cost generator is the kiss of death. It comes with endless baggage. Let’s talk the impact to procurement.
First let me say that we are talking about perception here. We could argue how all these functions contribute to the bottom line in some way, but that’s not relevant, because in the world of business, all that matters is perception.
As a procurement pro, just ask yourself, what happens when your company doesn’t hit their financials or needs to tighten their belt? Does it freeze your hires & spending on procurement personnel or does it double down and invest more in your procurement organization, because you will help them resolve these issues?
This is a really important question, because it cuts through all the lip service.
If your company freezes or, worse yet, reduces investment in the procurement function when the corporate belt needs tightening, that tells you all you need to know about how the C-Suite perceives your corporate role.
And we know the answer to this, don’t we?
Do you know which departments get less impacted, or even get invested in during downturns? The answer is 4 categories: Revenue Generators, Product Development & Innovation, Business Development & Customer Retention, and Strategic Initiatives.
None of those include Procurement.
Procurement is the ongoing recipient of increasingly tighter funding and personnel targets. Now guess who you’re going head to head with on the other side of the negotiation table, trying to find enterprise advantage for your company?
That’s right, sales people. And guess how their departments are funded and resourced? Very generously.
So it’s a battle that we valiantly prepare for, but it’s tough sledding, because they funded and resourced as a revenue center. They have more people than you. They have more and better data than you. They spend up to 20% of their time in training, while you spend up to 2%. That’s 10X less.
Every single person here has had to ask a supplier for data or documents generated by their own company. They have better systems than you, so all this stuff is at their fingertips.
It’s amazing that we’re competitive at all in this scenario. It’s a testament to the skills and perseverance of the dedicated people in this profession.
But this is no way to live, and it’s not just in negotiations. It impacts everything we do in this function.
Swimming upstream. Under-funded. Under-resourced. Under-valued. Under-everything. This is no way to live.
The reason we don’t have a seat at the table is because while generating great value, we allow ourselves to be perceived as a cost center, relegating ourselves to the back office. We are the ones that let it happen.
Just getting results isn’t enough, or the problem would have already been solved a long time ago.
The corporate narrative needs to change. The 2 CEO categories need to be changed from Revenue Generators and Cost Generators to PROFIT Generators and Cost Generators.
With this shift, procurement falls squarely in the Profit Generating function. We deliver contributions to EBIT. We are Profit Generators.
With this shift, corporations double down on their investment in procurement, because their bottom lines benefit from doing so. Because their corporate valuations increase. Because procurement delivers enterprise advantage.
Chief Procurement Officers, I’m talking to you. You own making procurement relevant. You own driving this agenda shift. You own this influence model. Get us a seat at the table and get us off the menu for lunch.
Now go off and do something wonderful. Be your best!
Omid G.
“THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. The CPSCM™ Certification Program does a deep dive on internal influence. Over 90% of external negotiations fail because of internal negotiation failure. Join the best in the world today.
Peter Grant was the manager for the British Powerhouse Led Zeppelin. He was an untrained negotiator. In fact, he was a former wrestler and bouncer. And at 6’5” and over 300lbs, he was a behemoth.
But where he really excelled was as the group manager for Led Zeppelin. And he changed the music industry forever with his negotiation mastery.
The standard in the music industry was for concert promoters and venues to get 50-60% of concert proceeds. Every single band – even Elvis, the Rolling Stones, and the Beatles – found themselves on the short end of this stick.
It’s not unlike the coffee industry today, whereby the supply chain link that does the easiest job relatively speaking – selling lattes – makes dozens of times more than the hardest and most important supply chain link – the farmers that are tirelessly growing, harvesting, and processing the best tasting coffee beans. That negotiation dynamic remains unchanged to this day.
Peter Grant was mostly a music outsider, but he saw this inequity and he was going to change it. He knew that, like the coffee farmers, THE BAND PLAYING THE MUSIC was the source of the value in the supply chain.
He devised a strategy to tell the concert promoters and venues the outrageous: His band would get 90% and they would have 10%, and not a penny more. At face value, it was preposterous. Why should they agree to this if an entire industry was giving them 50-60%?
On top of that, he also wanted more control of selected venues, more control over concert production, and he wanted guaranteed minimum payments to his band – which could mean greater than 90% of the proceeds in some cases.
Peter knew that he had to do something more than slam his fists on the table. Lots of managers for famous bands were doing that, and it wasn’t working for any of them.
He decided that at-the-table negotiation moves, which is what his contemporaries were doing, weren’t going to work.
He thought hard about away-from-the-table moves. He thought about the carrot and the stick, and how he could employ both.
What could he do to make the pie bigger for both parties, resulting in 10% amounting to more money than it would otherwise (the carrot)? What could he do to shift bargaining power, and put them in a position where they are under more pressure to accept these terms (the stick)?
He came up with the following:
He told the concert promoters that if they agreed to give him more control over venues and concert production, it would result in a better final product and greater concert attendance. This presents a benefit to both parties, he reasoned.
He also told them that he wanted to control ticket prices, and with the actions above, he could raise them higher than what the promoters were charging, and people would still attend. That too would make the pie bigger for both parties, he reasoned.
He also told them he would agree to exclusivity deals as a concession. This meant that the band agreed not to perform in a particular region for a specified period, creating a sense of anticipation and exclusivity around their live shows. This would further increase attendance and justify higher ticket prices, he once again reasoned.
He used these factors to influence, dangling the carrot to make business better for both of them. But in his back pocket, he had the stick too, and he threw it out there, plain as day.
“If you don’t think these terms are favorable to you, that’s ok too. We just won’t do business with you. You won’t have Led Zeppelin, the #1 rock band in the world.”
And in the end, concert promoters had no choice but to agree to the unthinkable. But they didn’t do so begrudgingly. The pie was made bigger, and they were enticed by the idea that increased ticket prices due to exclusivity deals and concert production that was more aligned with the artist’s vision would make 10% a pretty good deal.
And it was certainly better than the alternative – losing Led Zeppelin’s business altogether. And Peter Grant was famous for being ruthless when he felt he was being taken advantage of. Promoters knew that he wouldn’t hesitate to exercise this option.
But in the end, it was Peter Grant’s value creation negotiation strategy that really made the deal go, and his bargaining power moves made the promoter’s BATNA very, very weak.
Ever since then, the music industry dynamics have shifted in favor of the bands. If there was no Peter Grant, the bands would probably still be paying out 50-60% of their proceeds to this day.
Peter Grant, the former wrestler, bouncer, and completely untrained negotiator, is one of the prize fighting negotiation heavyweights of all time. We all should learn from him.
P.S. To become a rock star in driving away from the table moves, check out the CPSCM™ program. You’ll be glad you did.
