For optimal measurement, understand the purpose of each tool and use it to its fullest potential, either independently or in tandem with other tools, to fully evaluate the value proposition of unique proposals.
Standard Approach to New and Unique Opportunities
Stringent adherence to predetermined goals and deliverables can constrict a company's ability to see new partners and opportunities. It is easy to find partners to supply predetermined solutions. However, market leaders are not satisfied with standard solutions; striving to outperform their competition, market leaders state their goals in terms of their intended impact. They also partner with innovative companies with strong problem solving capabilities. Additionally, market leaders consistently capture the potential of new, complex proposals and are able to measure non-traditional opportunities better than their counterparts.
Inflexible Savings Definitions
Question: Who sets your company's sourcing strategy?
Answer: The department that is responsible for defining a company's legitimate "savings."
Don't believe me? Consider this: Negotiators evaluate agreement benefits in terms of hard and soft deliverables. Hard deliverables are often given more weight in the supply decision because accounting can track, validate and support the savings estimates.
Here is a common example at Company ABC: ABC's accounting department defines legitimate savings as any decrease in the purchasing price variance (PPV). Negotiators are discussing a one-year contract with two current suppliers. Supplier One proposes a 6 percent PPV. Supplier Two proposes a 5 percent PPV and guarantees a 3 percent reduction in inventory value.
Since ABC does not value inventory reduction as an PPV (rather, as an asset revaluation) it not valued as savings. Negotiators have more incentive to partner with the Supplier One, who has the highest PPV contribution, even though the Supplier Two can arguably create greater long-term benefits.
Accounting does not intentionally block good sourcing strategy. Non-traditional opportunities necessitate creative measurement that is difficult to capture. It is important to remember two things:
- The more limited the savings definition, the more limited the market opportunities and the less innovative the solution.
- Innovative companies seek out equally creative partners that appreciate revolutionary new market approaches.
The solution: closely tie the procurement and accounting divisions' departmental and personal performance targets. Shared targets facilitate the creation of accurate, quantifiable savings definitions.
Companies that consistently honor their agreement responsibilities can demand a premium contract partner and can better leverage future global agreements. Potential partners assume that a company's past predicts future contract performance, and in today's market the key is for a company to align itself with high-performance partners.
Global partners build their proposal, in terms of opportunities and costs, around their perception of your company's future contract performance. Companies failing to execute global agreement commitments find their market opportunities greatly reduced the next time they search for an agreement partner.
So how can a company positively enhance its reputation? By only agreeing to contracts that can be fully supported. Companies adequately prepared to meet financial and human resource commitments during cutover and implementation will find a plethora of eager partners.
Miscalibrated Speed and Timing
Speed Example: Regardless of language ability, the majority of foreign businessmen know one universal English phrase: "time is money." As Americans, we believe corporate leaders drive great deals on demand. Yet, in areas such as Asia the common belief is that the person who needs the deal the most agrees to it first. Americans striving to demonstrate strength by the speed and efficiency of their negotiations can be viewed as hasty, irreverent and naive in countries like China and Turkey, where businesses enjoy the art of striking the deal. For example, American companies often sign 1- to 3-year contracts with built-in evergreen and escape clauses. In Japan, a contract's trial period may be three years and the contract's returns evaluated over a 7- to 13-year period.