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- September 22, 2016
- David Hearn
Cloud technology is helping us break new ground in purchasing and procurement. However, we face a new challenge in using that technology to the fullest advantage: Breaking through some of the mental models that have grown up around the function over the few decades.
What I mean by mental models is people self-limiting themselves on what they can do throughout the source-to-pay process because of the way they’ve always done things in the past.
Killing off old mental models can be very hard. People are wired to want to stay in the status quo. But eventually there comes a time when survival depends on being able to change. There are four mental models we must kill in order to move purchasing and procurement into the broader, more strategic, technology-enabled function of spend management. In my last post, we talked about model one, mavericks and power users, and model two, no access for suppliers. Here are models three and four.
Old model 3: Catalogs for Products
In procurement, we think in terms of spend we can influence and spend we can’t. For the past 20 years, the main way we’ve influenced people to spend the way we want them to by steering them to catalogs in ERP-based systems that only include preferred suppliers. An employee goes in looking for a laptop, the system brings up the two laptops in the catalog, and they buy one. It's very structured—you might even say dictatorial. They can't just pick any laptop--the company can make sure it's a good one at a preferred price and it’s one that IT supports.
This is helpful for influencing spend, but the way catalogs are formatted in legacy tools has limited what types of spend can be influenced this way. Anything where you can't write down a name, part number, or per unit price just doesn’t work in this catalog model. Remember, these tools grew out of manufacturing ERP and MRP systems. When they brought them over to the indirect world, they just didn’t meet all of the needs. One of those needs is to let people buy services the same way they buy goods.
Let’s say your company buys services from three consultants who do finances and taxes. Everyone thinks, "You can't put that through a catalog because it's not a tangible good," and we declare it "spend that we can't influence." We’re self-imposing a limit on our ability to influence that spending because it doesn't fit the catalog mold.
New model 3: Catalogs for everything
With new, more flexible SaaS tools, we can influence almost every dollar of spend in order to maximize cost savings and bring better quality suppliers to our companies. This requires us to think of catalogs much more broadly.
How would you actually put three consultants in a catalog? Here’s how we did it at Juniper. We loaded the financial consultants into the system so that when someone typed in "financial consultant" it would bring up something that looked like a catalog listing with the three preferred suppliers, showing the typical rate per hour for that supplier.
This was the first time, in my experience, that an employee could go into a procurement system and see that some service providers cost twice as much as others. They see that and think, why?
In a catalog for products, you can compare prices and you can also compare features/functions. With services, we found that while price might be a starting point, people wanted to talk to the suppliers, see a proposal and then evaluate a statement of work, which describes better what the supplier is going to provide, how long it will take and how quality will be ensured. They want to be educated buyers and do the right thing.
You have to load non-traditional things in the catalog and let people start working with them in order to break this mental model. At Juniper, we put everything from the finance consultants to local mom-and-pop cleaning services in there. A typical company spends 40% of the total spend on services. That’s a huge amount of spend to gain influence over. In the old days, that was automatically out of bounds. No more.
The funny thing is, we had to break the supplier mental model on this too. I got a call from one of those consultants who said, "You can't put my rates in a catalog. That's confidential." I laughed and said, "Hey, you're just another good and service that's purchased. Obviously it's confidential to our company. No one outside can see. But employees have the right to understand your pricing and make decisions based on it."
Old model 4: Transactional processing group
I was on a panel recently with Bob Worrall, the CIO of Juniper. He commented that before he and I worked together, he had no idea what procurement people did. "I thought those were the guys that make sure invoices go to the right supplier," was what he said.
That’s the way it is in a lot of organizations: Procurement and AP are seen as clerical, transactional functions. This is the model that frustrates people in the profession more than anything. When people have a mental model that doesn’t value your profession very highly,
it can be pretty hard to go to work every day, even if you’re working to change that.
The reality is that indirect procurement for decades has been a clerical function. It has not wielded much influence over the business in terms of picking suppliers, and a lot of it had to do with the technology, or lack of it. Since the idea that this is was a clerical, purchase order and invoice processing group became fixed in peoples’ minds long ago, it's been pretty hard to convince people it’s anything different.
New model 4: Strategic business partner
I think that if procurement and AP can break out of this fourth model it will have a tremendous impact on their ability to find value for the company.
The key is using analytics to look at data across all the ways the company spends money and provide insights and solutions for lowering costs and improving the quality of suppliers.
We know that many people react better to facts and data than they do to people just saying, "things are different," or, "We're here to help." If you can create data that business leaders care about, such as improving time to market for marketing, or lowering costs for engineering, you can influence people much more easily.
The problem in the old world was that it was hard to do this kind of analytics because the data was divided amongst multiple databases. Purchase order data might be in one system, invoice data in another one, purchasing card data in a third. At my company, we had travel and entertainment expense reporting data in a fourth system, and then we had the actual data that came from the travel and expense credit card company in a different reporting database and format.
For example, let’s say a company was putting on a big customer at a hotel. They issue a purchase order to the hotel for the ballroom on a certain date with food, lighting and audio-visual equipment. Then they need a block of hotel rooms for the employees that will be working at the event. Those may go through a T&E card because the employees charge it directly to their expense reports. They need signage and decorations and all kinds of last minute incidentals, and those get put on p-cards.
Then there’s the videographer, who’s just a one man show. He can’t take a PO or credit card. He needs a check on the day of the event. Finally, there’s the photographer hired at the last minute who mails you an invoice after the event is over. You can see how this separates the total spend across many systems.
You could have transactions with the same suppliers in all five of those buckets, based on all the different ways people were doing business with them. Can you imagine how difficult that is for procurement and AP to pull together reports and then turn data into insights? It was next to impossible. You couldn’t come to a business leader with credible data and show them how you could help them improve things.
Now we have new SaaS spend management tools that were designed from the beginning to have data across all five of those areas in one place so you don't have to stitch it together or ask IT to do custom reports. There are analytical engines on top of the data pre-built to understand its structure and present it in an easy to use form for non-technical people. A sourcing or AP person can do it, without the help of a data analyst. Now we finally have the ability to bring business people insights that they care about.
Now we can go to marketing and say, "Okay, you spent $100,000 on your entire event. Of that, $65,000 was with preferred suppliers." Marketing says, "Oh my gosh, really? We didn’t get any discounts on $35,000. Can you help us with that?”
That’s a game changer, both for procurement, who had been struggling to get a seat at the business table, and for the business, who always looked at procurement as transactional and not providing anything in the way of business insights. I've been in companies where business leaders would not let procurement come and present to their staff because they don't want to waste time on transactional reporting, which they consider boring and backward looking and yielding no business advantage.
You have to break the mental model by letting them know, "I'm coming to you now with different information that's very insightful to your business." It won’t happen overnight, but if you can start break down old ways of thinking in some small ways, and build on that, there's tremendous value that can now be unlocked.
Mental models can remain even after the conditions that created them no longer apply. Breaking them down takes courage and perseverance. New SaaS spend management technology is the great enabler that can change your organization in the eyes of employees, suppliers and the company as a whole. And procurement groups will have a lot more job satisfaction because they’ll be impacting the business in a much more meaningful way.
David Hearn is a procurement consultant and a member of the Coupa Executive Advisory Board. He was the Indirect CPO at Juniper Networks, Sun Microsystems and Kaiser Permanente.