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- October 03, 2016
- David Hearn
Why do we still say we’re going to “dial” a phone number, when phones haven’t had rotary dials in decades? Why do we still call the TV remote a “clicker” when it hasn’t made a clicking noise since the 1960s? And why do procurement and finance professionals still feel that they have to restrict who can buy things within a company?
These are all mental models—ways of thinking and acting that over time have become so ingrained that people are hardly conscious of them, or that the realities they were based on changed long ago.
Do we need new words to describe how we make phone calls, or the device we use to control our TV viewing? It’s arguable. What’s not arguable is that we need to change our mental model about how people can buy the things they need to do their jobs. In most companies, we’re still using a mental model that says procurement must control all of a company’s spending on indirect goods and services—that is, everything not related to payroll or cost of goods sold.
I’ve been working to change this model for the past 20 years, attempting to bring requisitioning for all to every company I’ve worked for during that time. This is critical for elevating procurement to a more strategic level. But it goes beyond that. Offering requisitioning for all is critical for companies to run more smoothly, provide a better employee experience, and attain higher cost savings. I know that last one seems counterintuitive, more on that later.
Today, we have the technology to do this better than we ever have. But we still need to change the mental model.
The origin story
Where did this mental model come from? If you go back a few decades, most companies had few controls over indirect spending. There was no way to let employees buy things in such a way that they could get company-negotiated discounts from approved suppliers.
The technology we had was barely beyond green screen. It was so hard to use that you had to be a procurement professional--probably one with a manufacturing background, because that's the industry where these complex systems originated--to figure out how to place a requisition and a purchase order.
The solution was to stop individual employees from buying things, and make it so that everything had to be purchased through the procurement group. This was a valid strategy—at the time.
Where Sun shone
Over the past couple of decades, most companies have made steady progress on getting indirect spending under control. As early as the 1990s, when I worked at Sun Microsystems, we had a global indirect procurement team of 60 people. We had a requisitioning tool that was not great by today’s standards, but over the course of five years we still did a pretty good job of getting about 80 percent of spend under management. However, that still left 20 percent of spending uncontrolled. Sun was a big company, so that represented a lot of money.
The problem is that the 80 percent we did control represented the really big transactions, but the remaining 20 percent represented many, many small transactions—far more than 60 people could touch.
We thought that if we let more employees use the requisitioning system, we could leverage them to effectively become purchasing agents and help us get that last 20 percent of spending under control.
That was blasphemy at the time, and in many circles it still is. But almost every company faces the exact same challenge we faced at Sun.
In every company, at some dollar threshold-- it could be $1 million for a huge company or $10,000 for a small company--roughly 20 percent of the purchases would be for items whose cost is above the threshold. If you add up the total cost of all those purchases, they usually account for about 80 percent of all indirect spending. These are big purchases and these transactions are subject to a lot of scrutiny and negotiation and management, as they should be.
But while purchases below the threshold only add up to 20 percent of total spending, they make up the lion's share of the transactions. In procurement we call this the long tail, and we complain that we don’t have the resources to manage it.
Our theory at Sun was that if we empowered employees to purchase low risk, non-business critical items below a certain cost threshold on their own, they would do a decent job of it. So, that was what we proposed.
A difficult flight home
Most employees we talked to thought it was a great idea. They felt like, finally, those people in procurement who've been dogging me for the last 20 years have gotten some sense and are going to let me buy what I need without interfering.
However, I remember walking into our German office, where I was to meet with the then-CFO of Germany.
He said to me, “Mr. Hearn, we control our costs very closely because we are measured on profit and loss. We don't need someone from headquarters telling us to give authority to everybody in Germany to buy things they may not need, without professional procurement people, and no controls.”
I got the same lecture from the country manager, who was very impassioned because, of course, he was also measured on P&L. So, while the employees in Germany loved the concept, those two people just stopped me dead.
I remember flying home feeling defeated. I subsequently got feedback like that from all the countries in Europe, as well as in APAC.
An incomplete message
After collecting all this feedback, we realized that we hadn't done a good job of messaging. We hadn’t shared enough details, so people thought we were removing all controls, when actually that's not what we wanted to do.
Our requisitioning tool had full financial approvals, and also workflow to involve different management approvers if needed. The only thing we were changing was that none of our 60 procurement people around the world would stop purchases below the threshold, which we decided to set by country.
We believed that the risk in terms of liability to the company for a failed deal below the threshold was very low. But we didn’t have any data to prove it. So, I personally said I'd be accountable if a supplier or deal went South.
Still alive and well
After leading procurement teams and following this same concept at two other companies, I’ve never had to do that. The concept proved out. But 20 years later, when I had the same conversation with the CFO of Juniper Networks, the last company where I served as CPO, I had the same experience that I had with the CFO in Germany.
She was--and is--a brilliant woman, so this is not a question of intelligence. It’s evidence that this mental model is still alive and well. Both CFOs initially believed that by giving all employees access to the purchasing system, they would spend more.
The difference is that by the time I got to Juniper, I had 20 years of experience and data showing that spending actually went down. Not because people bought less--they still bought what they needed to buy. What happened was they felt empowered to negotiate a little bit themselves, whereas before they felt they had no control. When you give people accountability, they feel accountability, and so they take it.
The CFO at Juniper looked at the data and gave me the green light to go ahead. We had created mini procurement people, thousands of them, saving money on purchases no purchasing team would have had the time to go after.
Who’s holding on now?
The funny thing is, it’s not just finance leaders holding on to this mental model. Procurement is also holding on to this mental model, and that’s a tougher nut to crack because, in my opinion, it’s due to fear—both conscious and subconscious.
The biggest fear is that it won’t work, that costs won’t be lower, that it will get out of control and procurement will be seen as having done a ridiculous thing and failed.
Every procurement person already has a little bit of a chip on their shoulder because frankly, at just about every company, employees loathe procurement. I don’t mean they loathe the people, but they loathe function. We procurement people are all nice people.
What I think they really hate are the tools in procurement because they can't figure out how to use them. And they don't like the process because it feels like bureaucracy constantly getting in their way.
Top 3, but not in a good way
I have some data on this too. At Juniper, they measure employee satisfaction. When I first got there, according to their survey, procurement was one of the three things employees were most dissatisfied with.
I'd known for a long time that people didn’t like procurement. But that survey at Juniper was the first time I had data, and it shocked me to learn that it was in the top three things people were most dissatisfied with. I felt like there was a big target right on my chest, and on the chest of all my people.
Clearly, we have more to gain than to lose by letting go of this mental model. We have enough progressive companies who have broken this mental model, and enough case studies and data that we can have a fact-based discussion that should allay most fears about trying something different.
What we also have now, that we didn’t have before, are better tools. At Sun, the rudimentary tools we had only allowed us to partially realize our vision because even though we gave people access, many didn’t use them.
What were the other people doing? They were probably going to their admins, or they were just buying things on a credit card and not getting a good price.
Getting the chills
It wasn’t until we went out to the marketplace at Juniper to look at spend management tools that we saw new, easy to use tools that handle all types of spending, including p-cards, travel and expenses and invoiced spending in one place.
When I saw the demo for Coupa, there was a blank at the top of the screen that said, "What do you need?" I literally got chills when I saw that, because that single statement told me the people that designed this tool understood that tools had to be very approachable and simple, if we wanted everyone to use them.
Decades ago, we had to get our arms around spending because it was out of control, and we didn't have any user-based tools that were easy for employees to use, so we had to centralize all buying in the procurement team. Now, it’s time to decentralize, and democratize who can procure. Let everybody do purchasing below a certain dollar threshold. You will get more cost savings, your employees will be happier, and the process will be more efficient.
No more therapy
People have been shopping at home on the internet for more than a decade. When they can do the same thing at work, it makes them a lot happier. They don’t feel condescended to. That changes the mood at the company.
At Juniper, we dropped off the top three employee “dissatisfiers” list. I stopped going to therapy. I felt good about myself ☺.
In procurement, we all know that if we're more engaged with the business folks that need to buy something early on, we will have much more impact in getting them better suppliers, lower costs, and higher quality.
But when people hate the process and avoid you like the plague, they hold back details about what they're doing, and only tell you at the last minute because you can't really interfere much at the last minute.
We talk all the time about procurement adding strategic value, but if you have bad tools and bad processes, every discussion starts the same way: “You want to help me? Get my purchase orders through faster. Tell me why it takes two months to do a contract. Fix that before you tell me you're going to help me. Because you're not helping me now.”
Once it’s easy for anyone in your company to use the purchasing tools, then you can finally have real discussions about strategic value, thereby creating a new mental model, smashing that old one to smithereens.
David Hearn is a procurement advisor and a member of the Coupa Executive Advisory Board. He was the Indirect CPO at Juniper Networks, Sun Microsystems and Kaiser Permanente.