Do Procurement Departments Destroy Value? (A Cautionary Tale)

Posted 25/05/2016

A few weeks ago a good friend of mine, who works for a small IT firm selling cloud based software was excitedly telling me over a swift half (or two) that following a rigourous RFP process they had finally been selected to provide a well known UK brand with their services.  Flushed with the pleasure of success,  she was regaling with excitement all the ideas she and her colleagues had for this organisation, including how they were going to take the opportunity to add some extra resources in the background to make it an even better service than that contracted for, to truly delight this esteemed client. 

It was with some shock therefore that on resuming our Friday night drink some mere 4 weeks later that my friend was quite literally exhibiting the opposite behaviour with regards to what, on paper, was a fantastic win – to the extent whilst hunched over looking into her glass, she announced that not all business was good business, and that she was preparing for a call on Monday to advise the key sponsor of the relationship client -side  that, with regret, they might need to walk away. 

Now being a good Procurement Professional, with an extreme focus on the importance and value of Supplier Relationship Management I was struck  by this sea change in such a short space of time, and in the spirit of showing empathy to my friend, and genuine intrigue I explored what had brought about this turn of events.  What follows now is a brief overview of the detail: 

You remember I said my friend – let’s call her Anne – had won the work following an RFP process?  It’s worth spending a moment to consider how she’d managed to get on the RFP process at all as being a niche player in her space her usual client base was not large branded UK corporates but having been a successful corporate player personally over her career she had built relationships via her network and it was through this relationship with a member of the board she had got this fabulous chance.  Run by the procurement team, the whole process had been a bit of a challenge and some inefficiencies of communication had been felt but after a few iterations, negotiations, discounts here, cut of scope there, a commercial agreement had been reached in principle based on some standard legal clauses. So far, so good.

Now, like anyone who runs a small business knows, strictly when you work for a corporate you work on the basis No Purchase Order, No invoice when working for a larger corporate.  But Anne knew from experience, that to delight her new customer she needed to crack on.  She had assurances from her main contact, an email from the Buyer who had managed the process, and she felt her risk was low to pursue activity. She got her team behind her, inspired them to the vision, kick off meetings were held and the planning work began. 

Then came the first ‘interesting’ moment. One of Anne’s main contacts introduced her to ...let’s call him Sid.  Sid was an IT Buyer who would be person in charge of ‘sorting out that pesky admin’ known as THE CONTRACT.  Anne looks a bit surprised as this is a new face but not wanting to rock any boats unnecessarily shakes Sid’s hand and asks if she can help.  Sid says, “ it would be useful if you could provide me a salespack of what your system does and the broad commercials, etc.”.  Anne, slightly confused, says cautiously “ok, has anyone given you any briefing or context as this has been a fairly extensive process run by your Head of Procurement” (let’s call her Sophie).  “Yes”, Sid says, “ I know this but I thought it’d be better coming to you, it’s not difficult to provide a sales pack, right, and explaining it all to me?”.  At this point Anne, swallowing down her natural desire to say “actually, it is a problem, you have all the information from 3 months of RFP process and right now I have the quality of your delivery to see to rather than helping you avoid talking with your colleagues and reading the available materials” opts instead for the more considerate approach of a smile and “Sure, let me see what I can dig out for you”.  Anne duly sends some information and then returns to the job of planning the programme. 

A few days later someone mentions Sid in passing that Sid is about to go on holiday, alerting and reminding Anne to the fact she’s not heard anything from Sid since she sent the information.  So being essentially a nice person and not wanting to get Sid into trouble with his bosses she contacts Sid and asks him how are things going: “Ahh”, says Sid, “Yes I’ve reviewed the contract, I’ve made some suggested changes and by the way not all our users will be heavy users, so as this is a cloud based licensed agreement I’ve calculated that of the 100 users, about 75 of them will be light users and 25 will be heavier so as with all our other software licensed agreements we would expect different lower rates so could you do that?” 

Now, at this point you need to understand something about Anne.  Not a natural salesperson or negotiator, Anne is purely and simply good at what she does (something teccy), honest as the day is long, she sees things quite simply.  Right now, she’s completely been side-tracked and, several seconds later picking her jaw up from the floor she resumes her composure.  “Sid”, she says slowly, “ That won’t be possible given the commercial agreement we finalised on some 3 weeks ago.  During the RFP process I already have made significant concessions on set up costs, annual user discounts, additional support that doesn’t make it possible for me to effectively reduce ¾ of the user licenses more.”  Sid, who’s a seasoned negotiator and understands the value of presumed logical reasoning, listens in earnest and says, “I think you can see the logic I’m trying to drive at here, and I’m really trying to be consistent with every other contract we negotiate, all I’m asking is you go and have a look”.  Anne, sighing slightly returns; “if I do, would that help to get this contract over the line in the next couple of days?”.  To which our procurement friend Sid eagerly responds “Oh, yes”. 

So Anne, that evening after another long but great day shaping ideas and processes with the client IS team, sits down after dinner and considers the question. She decides in the spirit of expediency to offer a small reduction for the 75 users.  And duly the next day advises “Sid”, who without any notable emotion nods and advises he’ll write it into the contract.  The next day he then sends a note which Anne opens expectantly as this is probably the final version ready for signature. However the attachment is a scope of works, which Anne is asked to complete in full detail, along with a curt note that he, Sid, will now be on holiday for a fortnight, but this is all fine because he has updated his boss – let’s called him Fred – and things can get concluded with him next week. 

Now, it’s probably useful to remind ourselves about Anne again.  Honest as the day is long, yes, but sustainable and unduring patience is not what she’s known for and Anne is beginning to feel a tad concerned. After all she is still working in good faith, without PO or contract, she has several of the own resources on the team working and her business costs are ratcheting up hourly. Still, she remains hopeful, completes the scope of works and in an attempt to be helpful yet again, she uses up another couple of hours after dinner completing the SOW for the client and sends it to ‘Fred’. 

The following week (some 3 working days later), Anne is conscious she hasn’t heard from Fred and starts now to escalate concern. She doesn’t use her ace playing card of her A1 relationship, but rather the nice Head of Procurement lady who had been part of the original RFP process supporting Anne’s internal client -  remember we called her Sophie.  So Anne pops a note over to Fred that she’s not heard anything and copies in Sophie following a brief heads up to Sophie in the corridor. 

Amazingly when a boss is brought into play the Head of IT Procurement, Fred, calls Anne within minutes.  Anne takes the call.  Within moments Fred is asking Anne about commercials, the background to the project, and so on, to which Anne, who is now on the verge of losing the will to live asks Fred if he’s had a briefing from anyone as this feels like Groundhog day and no progress has been made. Anne calls Sophie, explains the position and Sophie is sincerely regretful and extremely surprised to learn Anne has not seen a contract yet. To use Sophie’s exact words “well I’ve seen a marked up version, I’ll get Fred to send it to you”….which begins to really worry Anne further as a marked up version should not be necessary given the commercials were based on an original contract base during the RFP. 

A meeting is arranged between Fred, Sophie and Anne.  Despite assurances to see this so called ‘marked up version’ prior to the meeting, Anne doesn’t. So Anne goes in blind to the discussion and Fred opens the conversation. 

“So Anne,” he starts “in order for us to sign this we need to see a few changes”.  “OK…”, murmurs Anne, “what kind of changes?”.  At which point, Fred proceeds to go through the 52 page document and picks at payment terms, service credits, liquidated damages, payment schedule, termination provision, invoicing provision and so forth to remove, so it seems to remove all obligations on the client and instead replaces with all obligations on Anne’s small niche IT business.  All of which on their own, and at face value do not seem major, but when combined in total with a backdrop of significant commercial movement during the RFP process make absolutely no good business sense to Anne. Moreover Anne is beginning to hear the alarm bells, this does not feel right so she says “ Fred, Sophie, I really really want to say yes to everything you ask me, and I can do all the things you asked me to do, except for the simple fact that the combination of all the asks I have a problem with twofold. One, because fundamentally it changes the risk to me of the contract and therefore changes the commercials, and Two, honestly, I don’t understand why you are continuing to negotiate an agreement that I thought was already in place.  Am I mistaken?”. Fred sits backs and looks at Sophie, and Sophie says: “the key thing is Anne, we both want to get this contract signed and we can’t get it signed without movement on those other areas – and we can’t change the commercials because that’s the budget we got signed off”.  Anne’s sigh deepens and adds that in the spirit of trying to resolve she’ll take a look and the discussion follows on some key points over the next 2 hours, some Anne feels she could possible allow (but wonders if she should) and some she can’t. 

Later that afternoon, popping up with a virtual email smile, comes the ‘friendly’ Fred along with a clumsily worded attempt at an assumptive close: “Here’s the final marked up scope of works and some further items we’ve considered on the contractual side we’d like you to review. You’ll find them all straightforward and reasonable so there won’t be any issues and we can arrange signature in the next couple of days”.  “Well”, grinds back Anne at the Buyer in sheep’s clothing, “yes, we went through everything previously so I’m hopeful it’ll be fine. Got lots to do today of course to deliver the programme but I’ll scan it overnight”, pleasantries were exchanged and each went back to their respective activities. 

But when Anne reads it, she knows that enough is enough. Not only is the whole basis (upon which her commercials were structured) being destroyed, like a sandcastle on a beach, but her core value buttons of honesty, morality and integrity are being pushed, causing her very core to scream that attempts are being made to powerfully exploit her at every turn for further squeezes. 

She makes the call to her A1 relationship contact and tells him that if the discussions with the Procurement Department cannot be stopped, she will need to ask her team to stop working so she can renegotiate the contract from first principles again.  Her contact is amazed at the turn of events, and furious that his own programme could now be in jeopardy. Internal fireworks begin and Anne downs the remainder of her pint with me as she concludes her story. 

“What will you do?”, I ask…,”Honestly”, says Anne looking straight at me “ I’ve invested so much time – and money – so far that I probably won’t actually walk away if I can make some money, but I can assure you that every minute we do from now on will be documented and charged for, because if I don’t they will take the opportunity to leverage me. I can’t afford for that to happen.” 

This story absolutely illustrates how short term tactical and exploitative behaviour destroys trust, destroys creativity and alters behaviour potentially irrevocably at the start of a project which may never be turned around.  These Buyers between them, whether unwittingly or not, destoyed the Value that Anne and her team intended to create.  Foolish indeed.  

So the key question to any readers of this blog is: Do you recognise this behaviour in your procurement team? Have you ever done this? Do you think some procurement individuals can destroy value?  Let us know in the comments.

Tagged by topic: Risk Management & Sustainability , SRM

  by Allison Ford-Langstaff

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