For most of us in "procurement"--whatever that means--words are particularly important to us.  For example, the nuances of a word's meaning in a contract is really critical (at least to us) and we really exercise our grey matter to get the words in a contract just so.

Why then does it seem--or is it just me--that a lot of us in our profession don't really know the differences between the terms purchasing, procurement, sourcing, materials management, supply management, and vendor management?

Our premier trade association in the industry even changed their name--from the "National Association of Purchasing Management" to the "Institute for Supply Management."  They also are changing the name of their certification from "Certified Purchasing Manager" to "Certified Professional in Supply Management."  Does that mean that "purchasing" is a dirty word, sort of like "vendor" instead of "supplier?"  Why is vendor negative or something less than supplier?  At least "vendor" has its root in Latin, which is certainly a better pedigree than what "supplier" has.  Well, that's perhaps a different blog posting...  Back to the topic at hand...

In simple terms, "purchasing" is the act of buying goods or services.  According to ISM's Glossary of Key Supply Management Terms, the definition of purchasing is "A major function of an organization that is responsible for acquisition of required materials, services and equipment."

Apparently, "procurement" is more upscale and means to obtain goods or services that meet the customer's requirements at the lowest cost consistent with appropriate levels of quality and service.  Also, "procurement" means something more than the very specific act of "purchasing," which, according to ISM's definition, includes "specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores."

According to ISM, "sourcing" is as equally narrow as "purchasing."  "Sourcing" is "[t]he process of identifying sources that could provide needed products or services for the acquiring organization."  I personally call this activity the "supplier selection" process.  But that's just me.

"Materials management" is apparently almost the same thing as "supply management."  Here's ISM's definition: "[a] managerial and organizational approach used to integrate the supply management functions in an organization. It involves the planning, acquisition, flow and distribution of production materials from the raw material state to the finished product state.  Activities include procurement, inventory management, receiving, stores and warehousing, in-plant materials handling, production planning and control, traffic, and surplus and salvage. In spite of a slight difference in meaning, this term is often used interchangeably with Supply Management.  More on that "slight difference" dilemma in a minute...

ISM defines "supply management" as "[t]he identification, acquisition, access, positioning, management of resources and related capabilities the organization needs or potentially needs in the attainment of its strategic objectives."  So where does the "slight difference" come into play?  I'm not sure, because they both look almost the same to me except that ISM defined "materials management" with more specificity.  Although, I do think "supply management" sounds cooler for some reason.

ISM hasn't yet defined "vendor management."  Which is neat, because that means I get a shot at defining it.  Although ISM might not agree with my defintion, here's the definition of a "Vendor Management Office" that I include in my book, The Vendor Management Office: Unleashing the Power of Strategic Sourcing:


I used the terms "purchasing" and "sourcing" because they sound more action-oriented than "procurement."  While I'm grateful to ISM for attempting to define many of the terms of our profession, when it comes right down to it, I'm going to use words that I like, such as "purchasing" and "sourcing" and "vendor management."  Maybe I'm part of the problem...

        

I had one of my senior staff come to me to make me aware of a vendor "situation."  The situation resulted from a lengthy competitive bidding process that this staff person had been managing.  The expected spend was close to a million bucks--so it was a good-sized deal.  Our internal customer had a project where the requirements weren't well defined, so we issued an RFI (request for information) to a number of vendors.  As usual, my staff person (a "he") gathered all of the responses to the RFI, reviewed them with the customer, and then developed an RFP (request for proposal) with detailed requirements that was sent out to pretty much the same group of vendors as was the RFI.

We use an RFx template that can be tailored for use as an RFI or an RFP.  The boilerplate language in the RFx template includes the following statement relating to the cost of responding to the RFx, "The issuance of this document and the receipt of information in response to this document shall not in any way cause [My Employer] to incur any liability or obligation to Respondent, financial or otherwise.  [My Employer] assumes no obligation to reimburse or in any way compensate Respondent for expenses incurred in connection with Respondent’s response to this document."

Just to be really clear with the vendors, in another section of the RFx, it is stated that, "The entire cost for the preparation of a response, the attendance at any subsequent conferences or sessions (as further described below), or participation in negotiations (if conducted) shall be borne by Respondent."

In the section of the RFx describing the evaluation criteria, there's a section that states "[My Employer] reserves the right to make a contract award without any further discussion with the Respondents regarding the responses received.  Therefore, responses should be submitted initially on the most favorable terms available to [My Employer] from a price, contractual terms and conditions, and technical standpoint.  [My Employer], however, reserves the right to conduct discussions with Respondents who submit proposals that pass the initial screening process of this document.  [My Employer] is not under any obligation to reveal to a Respondent how a response was assessed or to provide information relative to the decision-making process."

In summary, what that boilerplate means is that the vendor is taking on some expense in responding to an RFx that may ultimately be awarded to some other vendor for any reason whatsoever.  I could be wrong, but my 15 years of professional experience in procurement tells me that this is pretty standard in the world of commercial competitive sourcing.  If the vendors don't want to "place their bets," they can decline to respond to the RFx.

My staff person, being the professional that he is, conducted the pre- and post-proposal conferences in a fair and unbiased manner.  To ensure continued competition, my staff person proceeded to negotiations with two finalists (Vendor A and Vendor B).  Vendor B was not entirely compliant with the RFP instructions: we had asked for audited financial statements and redlines to our contract template (which we always include in our RFx templates that we send out).  Despite this, my staff person elected not to eliminate Vendor B, although he did repeatedly ask for those two requirements to be fulfilled by Vendor B (to no avail).

During the negotiation process--at the "best and final offer" stage--my staff person repeatedly gave non-proprietary and non-confidential "guidance" to Vendors A and B as to how they could make their proposals more competitive.  Vendor A listened up and Vendor B, uh, not so much.  Consequently, my staff person spent even more time with Vendor B (than Vendor A) in helping them sharpen their proposal--one could argue that doing so was unfair to Vendor A...

As much as possible, I like to "processize" everything I and my staff do--including vendor correspondence during a competitive bidding project.  Typically, when we notify a vendor that we have elected not to continue negotiations with them on a competitive bid, we send out a form e-mail that reads as follows:

Subject: Notice of Finalist Non-selection ~ [Name of RFP] RFP

Your company has not been selected as the finalist Respondent to [My Employer]’s [Name of RFP] Request for Proposal (RFP).  [My Employer] appreciates the time and effort of your company in providing a response to the RFP.  Please note that the communication protocol described in the RFP is still in-force.  [My Employer] is unable to provide specific non-selection information until the contracting process with the final Respondent has been completed.  Following such completion, [My Employer] will make a determination as to whether to provide non-selection information.

Basically, the e-mails says that "hey, we're busy right now, but at some point we may be willing to provide you with information as to why you lost the bid."  I understand the pressure that sales people have on them, so the e-mail is also intended to help them out a little bit with their bosses.

Ultimately, Vendor B wasn't selected due to price, functionality / capability, and unwillingness to comply with the other RFP requirements (such as providing the financial statements).  Unfortunately, when we ask for things like audited financial statements and redlines to our contract templates, we mean business.  Or, when we give BAFO guidance, and vendors elect to ignore it, we also mean business.

Because this particular RFI / RFP process had been lengthy and required some interaction with the vendors that was a bit more than normal, my staff person decided against sending the form "notice of finalist non-selection" e-mail to Vendor B.  Instead, he got with the internal customer and had a conference call with Vendor B rep to notify that the vendor had not won the business and why the vendor had not won the business.

Apparently, that wasn't good enough for the vendor.  I really do feel for the vendor not winning the business (despite all of our efforts to guide the vendor) but that's not an excuse to go on an emotional tirade--which Vendor B proceeded to do with both my staff person and the internal customer.  In the conversation, the vendor rep went through a broad range of emotions (expressed in words) from anger to indignation to pleading.  At one point, the Vendor B rep repeatedly demanded "Where's my reward!?" for the work it had done on its RFP proposal.  On the pleading part of the call, I guess the vendor was willing to offer a better deal when told of the bad news than its absolutely best and final offer given before.  Oops.

No one likes to deliver bad news face-to-face, but my guy was professional enough to have a conversation instead of sending an e-mail--only to get blasted for it.  The calls with Vendor B didn't end there, but I'll spare you the details...

The good news is that I have known of this type of tirade happening to me or my folks only a few times over my career.  Most vendors are extremely professional (to our face; I'm sure they're cursing us behind our backs) when they get the bad news and many are very appreciative to learn why they weren't awarded the business.

The other piece of good news is that Vendor B didn't get the business, and that hard-working, pencil-sharpening, low-maintenance Vendor A won the business fair and square.  By the way, Vendor A's price hardly changed from the beginning of the negotiations to the end--but Vendor B's did.  Apparently, Vendor A really read our RFI and RFP and paid heed to the statement in the RFP that said "Therefore, responses should be submitted initially on the most favorable terms available to [My Employer] from a price, contractual terms and conditions, and technical standpoint." 

Kudos to my staff person and Vendor A!

        

For all of you procurement pros located near the upper midwest (Minneapolis/St. Paul), you may be interested in attending a 2-day IT Best Practices Workshop presented by Caucus on August 5 - 6.  More information and registration for the event can be found here.  I'll be presenting the "Understanding and Negotiating Legal Terms" session of the workshop, 9:00 a.m. to noon, on August 5th.  A synopsis of the session follows, but suffice it to say that you'll leave my session with some real "golden nuggets."  I hope to see some of my blog readers there!

    Discussing or negotiating legal-sounding phrases and concepts with your suppliers can be difficult.  What are the business issues and what are the legal issues?  Where is the risk?  What can you give up and what are the implications?  What negotiation strategies can you use?  When should you seek assistance?

    For answers to these and many other questions, join us for a spirited session reviewing terms and conditions commonly referred to as “legal issues.”  We’ll dissect actual contract language to explain the issues, the risks, the trade-offs and the strategies for negotiating these concepts.  Some of the topics we’ll discuss include the following:

• Warranties
  • Merchantability
  • Fitness for a particular purpose
  • Title
• Indemnification
  • Basic
  • Intellectual property
• Limitation of liability
• Force majeure
• Damages
  • Direct
  • Indirect
  • Incidental
  • Consequential
  • Lost profits
  • Punitive
• Conduct
  • Gross negligence
  • Willful misconduct
• Choice of law
• Venue

        

Why would you ever want to develop an RFP with the intent of only sending it to one vendor!?

I've actually created entire RFPs and associated events, sending as sending out RFP issuance notices and conducting a proposal clarification session, when only one vendor was involved.  Am I off my rocker?  Quite the opposite, I'm trying to create what I call the illusion of competition.

Most procurement pros groan when a customer comes to them and says that there's only one vendor in the universe that can provide what that customer needs.  Talk about a bad deal headed your way...  At first, you might try to convince your customer that other vendors really do exist and you might even get the customer to consider the many other vendors that really do exist.  But, every now and then, you have a customer that is so stubborn or the political situation is such that you have to deal with one vendor.  Sometimes, if the "one and only" vendor doesn't have its claws into your customer too much, you can actually create the mystical illusion of competition through an RFP process.  And that's what I do whenever this type of situation pops up.  Fortunately, it's not frequently.

Not so long ago, I had a situation where I couldn't convince my internal customer that there was more than one vendor and the customer was high up enough in the organization to get a single-source deal approved without much trouble.  The deal involved software in excess of a few hundred thousand dollars--which was based on "preliminary" pricing from the vendor that it didn't want to budge on.  We also got a copy of their software license contract template that the vendor demanded we use--it was atrocious.  After some cajoling, I was able to convince my customer (since the deal was going to hit his budget) to take the time and effort to do an RFP, even for one vendor, because I thought the pricing wasn't aggressive enough and because I didn't want to get locked into a weak contract.
 
Convincing the internal customer to do a single-source RFP is one thing.  The other thing you need to ensure is that your customer can maintain the illusion of competition that you're trying to create.  In my example, I had the customer's buy-in and the customer was seasoned and savvy enough to follow along.  So, his staff and my staff ended up developing the requirements for the RFP.  The great thing was that, during the process of  having to put mind to paper, the customer had a better understanding of what they were really looking for.  That alone was worth the exercise.

Once the requirements were developed and refined, we drafted the RFP (using our master template) with a timetable, the requirements, evaluation criteria, proposal procedures, and a bidder proposal clarification session.  A cover e-mail was drafted and sent out with the RFP attached.  (Tip: I always send out RFPs (and RFIs) electronically via a cover e-mail that is addressed to myself and the prospective bidders are BCCed.  It's a great time saver, and vendors realize (or think) via the generic wording of the cover e-mail that there are definitely other bidders involved.)

As required by the RFP process, the one and only bidder duly provided an intent to bid.  Once their bid was in, the vendor was asked to conduct a proposal presentation to the "selection committeee" for the RFP.  Following a period of time of week or so, we then notified the vendor (via a generic e-mail) that they had been selected as one of the finalists.  We then sent out another generic e-mail asking the "finalists" to provide a best and final offer.  After receiving a revised offer, we continued negotiating the software license with the vendor, reminding the vendor that they need to deal favorably with us on the sofware license (or possibly face "losing" the business).  When we got everything exactly how we wanted, we then notified the vendor that they had been awarded the contract.  The vendor was very happy, my customer was very happy, and I was very happy.  It took two months and some investment of our time, but we ended up saving over $200K and had a very favorable contract.

So, when you're faced with a similar situation, instead of just "taking it," try a single source RFP process.  It sounds a little strange and takes some of your time, but it really works.

        

You've probably heard about vendor development, where you take the time to carry along and develop a vendor instead of kicking them to the curb.  It used to be that an under-performing vendor would be berated for their lack of performance and then likely get a letter from the customer describing that the vendor was in breach of the contract.  Termination soon followed.  Not so much anymore.  

Unless the vendor is really screwing things up or unwilling to prop up their performance, there's a trend to develop the vendor to get them to the level where they need to be.  That's a good thing.  In fact, in some cases, I have a tough time with some of my customers who want to see blood.  When I talk through the issues with them, and vendor development seems to be a viable option, my customers sometimes think I'm going soft.  I have a recent case, where the vendor isn't as sophisticated as my employer is, and we're actually sharing some policy and standards with them to bring them up to speed.  We're even offering them access to certain of our employees so that we can share best practices and do knowledge sharing.  In this case, the vendor wants to perform and we actually flew some folks (on our dime) to meet with them.  It's a touchy situation that needs to be handled delicately because people and companies sometimes don't want to admit they need help--especially if they think they'll be taken out at the knees if they do admit to needing help.

The real reason for this post is not to rant about vendor development--that's a whole different future blog topic.  What I do want to cover is "reverse marketing."  I think of reverse marketing as the umbrella concept under which vendor development falls and is only a part of reverse marketing.  Actually, reverse marketing is a fancy, nice word for "aggressive procurement," and I mean aggressive in a positive context.  "Aggressive procurement" or "reverse marketing" is all about making vendors want to do business with you.  Believe or not, vendors may not be falling all over themselves wanting to do business with you.  Particularly in this era of "assurance of supply" needs...  If you buy raw materials like concrete or steel, you know what I mean.  You're competing with customers in China, India, and Abu Dhabi for vendors of those materials.  But even if you don't buy raw materials like that, you're still going to experience competition for vendors--even for IT goods and especially for IT services.

So how do you compete with other customers for vendors?  Reverse marketing, of course.  It's really a twist of a mind-set that some procurement folks have a hard time getting their minds and attitudes around.  Instead of the vendor wining and dining you as the customer, you need to "wine and dine" the vendor.  Not literally, of course, but more figuratively.  Here's what I mean...

My employer consumes a tremendous amount of hotel room nights every year.  Around 62,000+ room nights or about 170 years of hotel room nights every year.  Yeah, we do a lot of travel.  With most of the chains, we're in the top ten of their customer base.  So much so, that I have a personalized, autographed picture of Paris Hilton on my desk.  Hey, it was the thought that counts...  Anyway, there is tremendous competition for hotel rooms and business travel (despite the financial situations of the airlines) is booming.  If you've stayed in a hotel room in a top tier city lately, you know, via the hotel room rate, what I mean.  Hotel rooms are not getting any cheaper any time soon, and that's because demand is outstripping supply.  So, even though we're a huge customer, we still need to court the chains to get the supply of hotel rooms we need.  How do we do that?  Again, reverse marketing.  

We recently held an event where executive representatives of the hoteliers were invited to a nice venue (and fed), as we presented the various events we were planning for the next 5+ years (yes, we plan that far out; in some cases, to 2020) and the desired cities for the events.  Our meeting planners introduced themselves and discussed their roles and responsibilities, and the Director of Meeting and Event Planning reviewed the strategic initiatives for her department.  The hoteliers left happy, full, and informed.  Do you think we stand out as a customer as a result of this?  Do you think this makes the hoteliers want to do business with us more than another customer that doesn't reverse market themselves?  Heck, yeah!  We also make an effort to attend hotel industry events, and we're a member of several convention and visitor bureau's advisory boards across the country.  We're one of a few organizations that sit on the Hilton Sales Board.  Why do we do all these things?  Because we know that we need to actively reverse market ourselves to keep ourselves relevant to hoteliers.

For you technology procurement folks, you can do the very same thing (and I do it).  Invite your top tier technology vendors to your facility, and have your IT execs share non-confidential portions of the IT strategic plan and annual business plan to the vendors.  Do it well, rehearse, and, most importantly, have food.  Be professional about it and sweat the little things, like giving the vendors directions to your facility and greeting them "at the door."  Have tables pre-set with placards with the vendors' names on them.  Like our vendors, your technology vendors will appreciate your efforts, they'll walk away with a better understanding of where they fit in and how they can contribute, and, more importantly, they'll want to do business with you.  What does it cost your company?  A little bit of your execs' time and some catering.  Big deal, considering...

Another suggestion is for you to visit your strategic vendor's facilities.  How often do you think customers really do that?  When we visit our technology vendors, they can't believe that a customer actually took the time to visit them.  In some cases, we've been the first customer that has ever visited their facilities--and I'm talking about vendors that have been in business for years.  Vendors love showing off their facilities, staff, and capabilities, and it gives their staff a huge morale boost.  It makes your account exec look great to his or her bosses.  This type of reverse marketing really puts you ahead of other customers.

Another suggestion is to attend your vendor's industry events.  And I mean really "attend."  That means offering to speak or present, not just showing up, at a suppler's event.

You know better than I do what efforts your company can take to reverse market itself.  My point of all of the forgoing is that my fellow procurement friends need to make the mind shift.  Instead of being pursued, you need to pursue.  It takes effort and you may need to do some convincing with your execs, but it's worth the pay-off.  You don't need to do it with every vendor or for every commodity, but you likely need to do it for someting.  But, I have a feeling that if procurement folks don't get smart on reverse marketing sometime very soon, they could find themselves competing at the bottom rung for some of their vendors' products and services.

        

Someone wrote an, ummmm, "interesting," review on my Contract Negotiation Handbook the other day that I really enjoyed (but in an "I hope this person doesn't know where I live" way).  I thought I would re-post here for my readers' amusement.


I really appreciate this person taking the time to write a review about my book.  I'd rather get positive or negative reviews than no reviews at all (but, of course, I appreciate glowing, effusive reviews more).

Unfortunately, as you might guess I would say, this reviewer is clearly misinformed.  Like most people, including me, the reviewer obviously doesn't read the forwards of books.  In my forward, I wrote "You may disagree with some of my tactics or feel uncomfortable using one or more of them.  That's OK--no one is forcing you to use any of these tactics, but you should at least be aware of them."

I'm obviously not advocating that we teach our children to lie--that's a bit of an off-the-meds stretch by the reviewer.  My point is that, regardless of the rhetoric the reviewer spouts, we shouldn't stick our heads in the sand and ignore what goes on around us.  Unfortunately, there are vendors still out there that use "old school manipulation," and, as I describe and explain in my book in detail, there are ways to spot and counter that type of manipulation.  One thing I do agree with the reviewer on is that manipulation is not sustainable.

The ironic thing is that sales for the Contract Negotiation Handbook spiked right after this person posted his / her review.  The reviewer, in his or her attempt to malign the book and discourage others from buying it, actually helped to increase sales.  Why?  Because people don't want to be taken advantage of, and the best way for them to prevent that is through knowledge and insight--which the book offers.  A "head in the sand" approach--apparently advocated by the reviewer--is also not sustainable.

        

Technology procurement is my primary area of commodity expertise.  When I'm at industry events, like ISM, folks sometimes ask me, "what's so special about technology procurement?"  Among other things, my answer always includes a discussion of risk. Technology procurement is just downright risk-intensive and requires that procurement folks step up their game.  It's unlike any other commodity, and takes a special type of procurement pro to be successful at.

Look at it this way. Let's say that your company decides it's going to build a small office building, maybe about $7 million dollars in cost. In many ways, that's very similar to implementing an ERP system, like SAP or Oracle--where you're going to pay about the same amount in software license fees, implementation costs (external and internal resources), maintenance and support, training, and the like.

For now, let's focus on the office building... Just imagine the team and process involved. Certainly, you'll need an architect to flesh out your requirements right down to the last square inch. You'll also need a space planner to design the interior. You'll need site plans, floor plans, and engineering drawings. Of course, all of this needs to be within code and approved by an inspector.  All of the plans and drawings will be an attachment to the future contract with the builder.  You'll select a builder through a rigorous RFP process and likely develop a contract with very, very detailed requirements and detailed payment schedules (with holdbacks and liquidated damages). The parties spend a significant amount of time negotiating the contract. I've seen 50+ page contracts for construction services to build a relatively small building. During the building process, there is intense day-by-day project and budget management. Change orders are clearly documented and nothing happens unless both parties are engaged. Inspectors come and go, and where inspections reveal deficiencies, the building contractor is under intense scrutiny to fix them as soon as possible. Otherwise, not much else can move forward. Finally, when the building is at completion, there's a punch list that the building contractor must complete before the building is accepted and an inspector issues a certificate of occupancy. Frequently, a customer won't accept a building and a contractor will be out a big chunk of money until the certificate of occupany is issued. Imagine the detailed contract documents that paper all of this. If you don't source construction services, you may be familar with how detailed and intense the procurement process is if you've ever built a house... In any case, trust me, it's a rigorous procurement and contracting process.

Now compare the above with a typical software license purchasing scenario for an ERP system like SAP or Oracle. In most cases, your customers' requirements will be ill-defined, so the resulting RFP isn't very substantial. The RFP process is relatively rushed, because your customers want to get this project started ASAP. The ERP account execs may be running amuck during the RFP process, influencing your customers. The vendors want to do the deal on their paper, which doesn't seem very comprehensive. The implementation services are also ill-defined and seem more time and materials based than deliverables based. For the license agreement and the services agreement, the vendor doesn't want to commit to anything (in fact, they disclaim even remotely possible UCC warranties) and the contract likely explicity says that they don't guarantee their software will work. They howl about revenue recognition when you want holdbacks and liquidated damages for non-performance. They don't want to give on acceptance periods, and want you to basically take their software as-is. During implementation, project management on the vendor side is spotty. Change orders are typically verbal and rarely documented. Scope creep and budget overruns become major issues. Both the customer and the vendor try to get the system slammed in so they can declare success. Users are bent out of shape when the system is finally delivered.

So why is the process between procuring construction services and technology so different? Particularly, when the process of "constructing" a building and "constructing" a system are quite similar?

It boils down to process rigor. People just accept that the procurement of construction services is going to be a detailed and very thorough process. Imagine a building contractor not agreeing in their contract that the building they will construct will habitable. That contractor would quickly go out of business because that position would be unacceptable to customers. But that's what a lot of software license agreements essentially say--vendors don't agree that their software will meet your needs (software vendors typically disclaim the UCC warranty of fitness for particular purpose).

When it comes to IT and technology, money doesn't seem to be an issue, and customers pretty much can get what they think they want. And vendors know that. That's why technology procurement is so risk-intensive--it doesn't (in many cases) have the same process rigor that procuring construction services does.

The crux is creating a process, mindset, and culture around technology procurement that your customers become familiar and comfortable with. As procurement pros, that means it will take you purposeful effort and time to make that culture happen.  You can't slam-dunk it either.  It needs to be slow, but steady, progress.  You need to work closely with your customers so they see the value of a more disciplined process from a "what's in it for them" perspective (one example is a software system that works).

You also need to work with your vendors so they also understand the value. And that's where the whole "vendor management" philosophy comes into play with your technology vendors. Unlike the construction industry, you'll need to invest much more time developing your technology vendors and working with them to create coherent and process-based procurement.  Unless you (we) do these things, technology procurement will continue to be the most risk-intensive commodity of all the commodites that procurement pros source.  I've been successful in making technology procurement less risk-intensive, but I can tell you that it does take a significant investment in effort and time.  If you're a procurement pro that likes commodities that are cut and dry, technology procurement isn't for you.

        

Amazon.com ships my books out pretty quick, but for those of you that would like to obtain my books immediately, you can download them at the following links.  Plus, the downloads are available at a discounted price.  Another benefit of downloading the books is that you can "cut and paste" some of the items I've included in my books, such as requirements for a contract management system, an RFx requirements repository, and various contract provisions.

The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals

The Vendor Management Office: Unleashing the Power of Strategic Sourcing

        

I went through an internal audit recently, and the objective of the audit was to determine if my department was appropriately reporting cost savings from procurement activities.  The reason for the audit was a steady and very significant savings year-over-year for the past few years--which, coincidentally, coincides with the time I came onboard.  Hmmm...

Believe it or not, I actually love working with my internal audit department.  Seriously.  They really are pros at what they do, and they don't go off the deep end like some other internal audit departments I've worked with.  In fact, I've actually asked them to do other audits on my operations because I've found that they have the same goal I do--to be better, faster, cheaper, and so on, and without getting caught up in audit esoterics and trivia.

The good news was that, excluding a few thousand dollars on an over $8 million dollar reporting savings, the audit found that  my group had been calculating savings appropriately.  So, it wasn't some new VMO voodoo math that I started using when I came onboard--the savings were the result of overhauling our internal processes, hiring better staff, and getting more training (among many other things we did to improve ourselves).

What my internal audit department recommended, and what was missing, was a comprehensive set of cost savings standards and a peer review audit to verify savings.  As a result, I created the following, which my internal audit approved.  You might want to consider something similar for your procurement organization.  Here's the excerpt from our "Purchasing Instructions Manual."  If you think my standards are missing something or could be improved, please comment!

P.S.  Where I work, cost savings and cost avoidance are lumped together and referred to as "cost savings."


Cost Savings Standards and Reporting

VMO staff shall adhere to the standards described below when calculating and reporting cost savings.  These standards will be reviewed with VMO customers on an occasional basis to ensure that cost savings are being calculated and reported appropriately.  VMO staff are required to conduct peer review audits to ensure that cost savings are being calculated and reported consistent with the following standards.

Permitted Cost Savings

- Actual cost savings, such as reducing the cost of goods or services already being purchased.  For example, reducing the cost of annual software maintenance.

- Cost avoidance, such as reducing the proposed cost of goods or services that are being contracted for.  For example, reducing software license fees from what was originally proposed.

- The dollar value of concessions where such value is easily quantifiable, such as obtaining a higher level of service at the price for the lower level of service.  For example, negotiating the concession of 7-day by 24-hour technical support for the cost of 5-day by 8-hour technical support.

Cost Savings Exclusions

- Cost savings resulting from contract audit reviews performed by other departments or work units.

- Cost savings associated with established discounts for ongoing transactional purchases beyond a maximum three-year period.

- Cost savings associated with any employee discount program, such as Dell EPP.

- Cost savings associated with procurements where the VMO was not materially engaged such as where the VMO did not strategize, lead, or materially participate in a negotiation.

Methods of Calculating Cost Savings

- Cost savings cannot be calculated from list price; rather, cost savings must be calculated from the first proposed non-list price.

- Where forecasted quantities or usage of goods or services can not be reasonably quantified to calculate cost savings, previous annualized quantities can be alternatively used.

- The total of multiple-year cost savings can be accounted for in the year that the negotiation occurred, provided that the savings are projected for a maximum three-year period and provided that savings are not re-counted in future years.

- The dollar value of concessions must be easily calculated and clear.

- Actual (not merely contractual) reduction of penalties, liquidated damages, terminations fees, or settlement amounts can be counted as cost savings.

- Where contractual penalties, liquidated damages, or termination fees were lessened as a result of negotiations, and penalties, liquidated damages, or termination fees were actually paid, the difference between what would have been paid had the same not been pre-negotiated can be counted as cost savings.

        

Customer to you:  "Why is it taking so long to get my deal done?"

For you procurement pros, does that sound familiar?  Remember the good old days when you had a 30-day contract turnaround time metric and customers seemed to be OK with it?  Today, if I told my customers it would take around 30-days to do their deal, I would have a mutiny on my hands.  More and more it seemed, the faster that my staff and I pumped out deals, the customers would want their deals done even faster.  Is it because I kept raising the bar and my customers' expectations continued to inch up, too?  Is it because my customers had unrealistic expectations and could give a hoot about getting a good deal?

I don't think it's any of that.  I blame the Internet.  Yep, I think the Internet is the basis for my customers wanting deals done faster and faster.  Sounds crazy, but here's my rationale...  If you went to Amazon to order my Contract Negotiations Handbook (here's the link in case you need it--hint, hint), you would know the availabilty of the book, you would be able to purchase the book using a very customer-friendly graphical interface, you would get a confirmation e-mail from Amazon, and then Amazon would update you via e-mail as to the delivery status of the book.  If you wanted to get a better understanding of the delivery status, you could click on the tracking number and pretty much know when and where the book was--and when you would actually get it.  The same goes for a fair majority of the storefronts on the Internet.  This is what your customers and my customers are getting used to, and the purchasing process of the Internet is coloring the lens that our customers are viewing us through.  In other words, our customers are wondering why we're so hard to do business with and why it takes so long.

What I've discovered is that it's really not the speed that matters so much to my customers--it's the "touches."  The storefronts on the Internet frequently "touch" their customers with information.  Dell is a great example of this.  I just recently bought a new computer from them, and I received e-mails from them that basically took me through the stages of the entire build of my computer.  At pretty much any moment, I was able to track the birth of my little computer up until the day that it showed up at my home.  It's that and not so much speed that matters to customers--I think...  I've experimented on my customers to see if my theory of "touches" shakes out and it holds to be pretty true:


So, as a result of the above, I require my staff to send out status reports to their customers and VERBALLY (either in-person, phone, or voice-mail) communicate the status as well.  That has to happen before Noon on Friday.  For one of our more significant commodities, we have a weekly standing meeting to discuss status--customers can attend or not attend (it's up to them).  Whenever possible, I ask my staff to communicate VERBALLY with their customers, and not through e-mail.  Also, my staff have an objective in their performance review to have an informal face-to-face with their major customers (such as coffee or lunch, which my department pays for) every quarter.  At the end of last year, we held a customer appreciation event, with catered food and major prizes (donated by our vendors) including trips and a laptop, and with a short presentation on what the VMO accomplished with the customers over the past year.  We even gave out awards to the customers who had partnered with us to save significant amounts on money.  The point of all of this is to "touch" our customers as much as possible without overloading them.

The good news is that our customers seem to be less time-sensitive and we now have better relationships.  Plus I think we have partially neutralized the effect of the Internet.  As purchasing pros, one thing we always need to keep in mind is that we're what is standing between our customers and what they want.  And sometimes we have competing objectives: our customers may not care how much they pay or risk they take on, but we do.  But, when it comes down to the nitty-gritty, those customers are why we have jobs and we need to serve them accordingly.  "Touching" those customers is a great way to keep them happy and satisfied.