Since the onset of trade, negotiation has been the cornerstone of commerce from marketplaces where deals were struck through time-honored bartering techniques to the complexities of the headline-grabbing mega-transactions of today. Within procurement, however, this art of negotiation (credited for forging strong and lasting relationships between suppliers and buyers and precipitating significant cost savings) is being displaced by quick-fix auction and pricing solutions.
So while procurement professionals are frequently the best negotiators in the company, thus far they have been forced to rely on software that doesn't recognize the complexities and value of effective negotiation techniques. This software also prohibits effective management of the negotiation framework itself. Most disappointing of all, many professionals have found that auction systems don't help in applying the Best Practices that have been so important to achieving strategic efficiency for procurement.
Companies are realizing, though, that event-driven, line-item cost savings achieved through auctions, while sometimes dramatic, often result in burning bridges with the very partners that procurement depends upon. This is particularly distressing when supplier performance is mission-critical. The real opportunities lie in using technology to better leverage procurement expertise, training and total value add (far beyond catalog pricing) through platforms that help deliver better results, faster, at lower cost and for the long-term benefit of the company.
Negotiation Is Key
At the heart of strategic importance are these four, interrelated and interdependent objectives, each of which is near and dear to today's procurement professional, as well as to Wall Street's view of the company's potential:
1. Obtain competitive purchase price, usually at the line-item level
2. Reduce total cost of ownership over the life of a program
3. Improve supplier performance while measuring criteria from quality to delivery and support
4. Motivate early supplier involvement to drive further cost reduction, earlier
But current e-procurement solutions don't allow procurement professionals to do much beyond the first goal, let alone make progress against all four best-practice goals. Negotiation, the cornerstone of best practices, has been missing from the technology picture.
Businesses evaluate and negotiate relationships on multiple parameters including quality, reliability, delivery and payment, reports Lara Abrams of Aberdeen Group. She adds that current solutions show an inability to support multi-variant negotiations within the context of a serial online thread that considers supply chain parameters beyond price & These limitations pose a barrier to the efficiencies of e-markets and limit the usefulness of the Web as a tool to design and manage efficient supply chains.
Shortcomings of current technology may explain why adoption numbers are still low; early e-procurement software has often failed to meet real-world requirements. Forrester Research reports that only 16 percent of organizations polled are currently using the Net for auction systems, and fewer still (8 percent) say that the Internet has had a significant impact on the procurement process. For 87 percent of organizations surveyed, however, the Internet is a key component of purchasing plans in the next year.
The need clearly exists, then, for e-procurement technology that goes well beyond the transactional instant gratification of auctions and dynamic pricing events, to address the real-world best practices goals and ROI needs of the strategic procurement organization. The solution lies in returning to the roots of procurement negotiation to empower the purchasing manager to do what he or she does best.
The industry is already moving in that direction. While auctions are slowly failing their users, the Net is still being used extensively to identify new suppliers. Forrester reports that 80 percent of organizations are using technology in this research capacity, and a full 50 percent are collaborating with suppliers online. This is powerful evidence of the trend toward utilizing technology to build stronger, closer relationships.
Procurement in the Spotlight
The ever-increasing motivation for advancing e-procurement stems from the fact that supply chain operations represent the most significant and rewarding focus for cost savings between organizations. Across the supply chain, corporations have been actively seeking ways to cut costs and eliminate wasteful processes. After years of this streamlining effort, production planning processes themselves cannot be compressed much further without risking quality and reliability issues. Collaborative product design applications have already transformed the concept phase of a product, and line-item price cannot be squeezed much more without further alienating broader best practices goals.
These advances now put procurement, and the complex commerce processes for which it is directly responsible, squarely in the corporate spotlight. The extent to which companies interact with suppliers to negotiate deals provides an ideal focus for reducing costs and adding strategic value. By steering away from auctions and one-time pricing events towards true negotiation, mutually beneficial relationships that aid in long-term savings (not just a quick turnaround on the lowest price) become the goal.
Abrams agrees. She writes, Over time, this commercial relationship management solution could help change patterns of behavior within supply chains, speeding negotiation, effecting greater efficiencies, and improving upon complex sales processes and management of tiered commercial trading relationships.
While corporate leaders are well aware of the need to further compress operations, the role of the procurement professional in extracting value through negotiations has not yet been fully considered or called upon. For 20 years, corporations have neglected to sufficiently monitor supply chain costs. Only recently has this function been assessed qualitatively, and even then only from a data perspective, not realizing the full potential of the procurement function -- CEOs have been impressed with the 10-20 percent cost savings they experience in the indirect space from first-generation solutions. But one fact that is often overlooked is that the savings gained in auctions are a one-time benefit, and that each auction is a unique transaction based on no prior relationship.
Relationships and Results
People are indispensable to creating and managing relationships; technology can certainly help expedite and organize, but it can never replace the judgement and skill of the trained procurement professional. And meaningful relationships remain the key to improving supplier performance and product quality, as well as significantly decreasing time-to-market.
Decades of professional skills development in the procurement field have led to the understanding that successful supply chain management and best practices attainment depends on human interaction around complex, iterative trade-offs. Dozens of factors, which are driven by skill and judgement, depend upon a framework of communication that allows procurement officers to build and demonstrate sustainable savings for their companies.
Technology should make us faster, better, stronger, and more alive in the way we do our jobs. Early solutions have enabled quick transactions and one-time savings, but at the cost of jeopardizing the trust inherent in long-term relationships the very relationships that are at the core of procurement's potential. With the proper tools, the best practices procurement professionals know and believe in can not only be achieved, but broadened as well. And as negotiation processes adopt modern technology, all parties involved in strategic negotiations will once again find a forum in which to add significant value to their companies' bottom lines.
Jeffrey Conklin is founder and CEO of Ozro.