A good procurement event is one in which the buyers find the best combination of problem-solution fit, a reliable supplier, and a reasonable price. We call this value-for-money. Problem-solution fit refers to the degree to which the good or service purchased fixes the problem that motivates the procurement. The buyer’s objective function is to maximize value-for-money.
Traditional Sourcing Can Generate Insufficient Competition
To obtain value-for-money, traditional procurement starts with a description of the problem. Most often, the process extends this to determine what a solution will look like. The buyer organization will then solicit proposals from its existing set of vetted vendors, not for how they might solve the problem, but how and whether they can deliver the kind of solution the buyer has determined to purchase.
For a supplier with the inside track, this process of defining what a solution will look like before the buyer solicits proposals is an opportunity to “shape” the request. The all-too-common outcome is one in which the buyer has consulted the well-connected supplier who defines the solution to the buyer’s problem as being one for which that supplier’s product has a unique fit. It may not be the correct answer for the buyer, but it guarantees the insider a deal.
The buyer will review the submissions it receives in response to its general solicitation and selects one with which to move forward into contract negotiations. Another key behavioral bias plaguing buyers is the tendency to pick the shiniest, most well-presented proposal. Many times, the buyer does not perform independent due diligence beyond reviewing proposals, such as indirect reference checking. This favors large companies and incumbents, many of which are the companies that are in the best position to shape the RFP in the first place.
This manipulation of the RFP discourages other suppliers from responding. The supplier’s decision to respond to an RFP is an investment decision. It can cost thousands of dollars to put together a bid. How big is the opportunity? What is my likelihood of winning? What is my relationship with the client across the portfolio of products I sell? Has the buyer decided already? Is this just a pro forma exercise in compliance? Buyers might be surprised at how easy it is for a supplier to identify an RFP as shaped (and, by extension, pre-determined).
Buyers often mistake the lowest price for value, in effect ignoring the other two dimensions of problem-solution fit and vendor suitability. This is a mistake.
Another key obstacle is bureaucracy. If buyers burden suppliers with onerous administrative requirements, then the additional cost of navigating this can help tilt the supplier’s bid/no-bid decision against submitting a response. What’s worse, buyers often don’t write RFPs that communicate their needs well.
The RFP is an auction. It is a reverse auction, but it’s still an auction. Not receiving enough bids translates into a failed outcome in which it is much less likely that the buyer can obtain value-for-money. We talk about the negative consequences for problem-solution fit from failed auctions here. Imagine a regular auction in which there were only two or three bidders. They wouldn’t be inspired to compete on price either.
Nobody at Sotheby’s says “three bids and a buy.”
Traditional Procurement Has Other Problems, Too
The best procurement events generate sufficient competition in terms of price and solution by making it clear from the outset that it’s a fair fight. One way to do this is to not prescribe the form of the solution. Instead describe the problem and let suppliers tell you how they would solve it. We call this outcome-oriented sourcing. This makes shaping much more difficult.
Traditional procurement takes too long. It is a sequential, linear process of gathering requirements, identifying the form of the solution, developing the statement of work, soliciting suppliers to submit bids, and evaluating the submissions.
There may be a committee involved. This requires obtaining stakeholder consensus, something that drags the process out further.
When executed badly, it focuses more on documentation and process than on the final product. Perhaps there is a sense that following a set of formal guidelines will permit the best option to emerge in a manner that prevents waste, fraud, and abuse. This may be true in some cases but for the original sin listed above: the “shaping” of the RFP itself.
Often, traditional procurement, likely from a bias to risk aversion, will limit its solicitation of bids to only vendors who have been vetted previously with an arduous onboarding process. If this set does not include many (or any) suppliers who can answer the call with a solution that might fit the problem, then the buyer has a failed auction.
Buyers should perform intelligent reference checks, not just with the names the suppliers gives them, but with others they can identify as relevant, as well. Would you use this solution again if you had to do it all over? Why not? What would you use if you could start from scratch?
Could the Agile Methodology Improve Sourcing?
The agile method of software development may help us improve procurement.
In agile, we take a large, monolithic software project and break it into smaller chunks. Teams work (in parallel, where possible) independently on these constituent parts, iterating rapidly through different versions to iron out the kinks, until the pieces are complete and tested. Then we integrate them into the larger whole. Throughout, the process is collaborative within and across the individual teams. It may be the case that different vendors or different tools are involved in developing the different pieces. Often, there is little documentation, with the rationalization that the codebase is changing too quickly.
Agile sourcing would be used to develop the outcome-oriented definition of the problem by breaking it into smaller pieces, distributed across multiple teams. We’d then have a way of soliciting proposals on either the parts or the whole. We would need an expedited process for picking suppliers, again, executed in parallel. If it was a sum-of-the-parts approach, we’d need to coordinate the assembly of the parts across potentially different suppliers.
On the face of it, applying agile to sourcing can make things run faster, at least. But an agile approach to sourcing may not work well because of the different context.
It requires extraordinary leadership to manage separate groups made up of people “from the business” and procurement officers to a strategic vision of the whole when those entities perceive that they have independence to build their individual component. Agile may work for running small tactical purchases. It becomes exponentially more difficult as the overall project becomes larger and interdependencies more complex.
Within individual teams, the iterative approach of problem definition becomes vulnerable to what the developers call “scope creep:” the addition of new requirements beyond the fundamental problem.
The need for collaboration between the different teams is paramount to keep to the vision of the strategic whole. This requires significant coordination and real dexterity on behalf of the individual team leads. This can become an issue if the business leads deal with sourcing infrequently, lacking the training in this particular type of project management.
Having different vendors build separate pieces of the puzzle may make subsequent integration trickier to implement. It may also discourage the participation of vendors who are unwilling to invest in a project if they cannot anticipate with certainty winning a sufficient portion of the business to move their own bottom-line needle.
Teams can find the iterative process to be tedious and less interesting than the heady period of solving the problem initially. In a sourcing context, this means iterating through the definition of the problem and identifying relevant potential suppliers. The more exciting thing to do may be to establish a hasty conception of the problem and to rush to market for its feedback. This restricts competition. Insufficient description may lead to weak problem-solution fit.
As the name suggests, agile optimizes for speed. The problem is that quality can suffer.
Elastic Procurement™ Is the Best of Both Worlds
What would a happy medium look like, one that borrowed the best features of agile and adapted them for sourcing?
- Usage-Based Model: The procurement staff will use the technology frequently, but the businesspeople will only use it on a project-by-project basis. Pick a system that permits paying for project execution, at least as an option for some of the users. This encourages engagement.
- Rapid Onboarding: Rapid, minimum required onboarding enables a level of comfort with vendor risk that permits buyers to canvas a wide range of potential suppliers. Solicit all suppliers discoverable in the space. Buyers can perform deeper vendor due diligence with the selected supplier during contract negotiations, in parallel.
- Effective Reference Checking: Buyers execute direct and indirect reference checking with a simplified RFP-like execution, in parallel.
- GenAI Tools: Automation tools that kickstart the generation of a problem statement and potentially supplier proposals can expedite the process.
- Outcome-Oriented Sourcing: Specify only the problem. Do not hint at what the solution should look like. Minimize the possibility of shaping or any kind of incumbent bias.
- Collaboration Tools: There should be a dedicated, containerized place in which structured data and social networking tools can permit people from multiple teams and organizations (including suppliers) to work on the project. No congestion from different toolsets that may not be shared across users.
- Scoring Tools: The technology should have features for evaluating supplier proposals quantitatively as a first step in the process of building stakeholder consensus. These may be augmented with GenAI, as well. This can anchor the discussion.
- Easy User Experience: A simple user experience encourages suppliers to participate and will help slice through the bureaucracy that stifles the process.
Outcome-oriented sourcing removes the possibility of shaping. A contemporary user experience combined with messaging reduces bureaucracy. The GenAI tools act to break the project into its components, define the constituent problems, and then roll them up quickly into the whole before soliciting suppliers. There is only one buyer committee, so the problem of cross-team coordination is off the table. The scoring tools (again potentially augmented by AI) expedite getting to stakeholder consensus. The sourcing is now for the larger project, making it appealing to more sophisticated contractors.
This is what we have built at EdgeworthBox: a set of tools, structured data, and community that enable B2B buyers to ensure they buy the right solution, from the right supplier, at the right price. It is simple and distinct. It is much easier to use across the breadth of the enterprise, accelerating the time to consensus and shortening the procurement cycle, while surfacing more competition on price and solution for better long-term economics. We’re working to leverage our domain expertise into generative AI solutions using new Transformer foundational models. If you’d like to learn more, please shoot us a note.
