All of these questions (and the philosophy they represent) revolve around the transaction of acquiring the technology and the solution These questions mainly address the requirements of the procurement department. Indirectly, they address the question of how the procurement department fits into the organization chart. How will the C-Suite see procurement?

They implicitly ignore the end users, the ones who actually translate “strategic goals” into tangible action.

This is entirely the wrong way around. In discounting the end users, the ones who actually translate “strategic goals” into tangible action, the buying organization sets itself up to fail. It is a well-established fact that user-adoption is one of the primary reasons for the failure of technology-centered transformations.

Procurement’s customers are the people who are the future end users of the acquired solution. These are the people procurement should serve in the same way that the company focuses on its own customers.

If we are buying a solution that we intend to use for the next five years, the primary consideration should be the value created over the next five years. The bulk of the return on investment (ROI) comes from this, not from negotiating the price down with the vendor by a couple of percentage points.

The real ROI is going to be determined by those who use the solution, the intensity of their engagement with it, and the outcomes it generates that the organization would not obtain otherwise.

If procurement buys a tool that nobody uses, it’s a failed outcome. It is bad for the organization because they have wasted money. It is bad for the end users because they have to revert back to their old ways or produce kludgy ways to work around the newly acquired good or service. It is bad for suppliers who had hoped to build a lasting relationship.

It is a massive misallocation of resources no matter how compliant the process is.

The ROI of a product nobody uses is -100%.

Early-stage companies focus on building and determining what works and what does not. The nascent entity strives to improve features in their own product offering that the customers like and kill those that the market does not. This is the explore phase. The firm concentrates on determining what the customer needs the most and then works on making the customer successful in the most-efficient manner. When it comes to buying goods and services, procurement talks to internal end users and invests the time and effort to determine their exact requirements. While the procurement approach may be transactionally inefficient, using pen-paper, spreadsheets, and emails, the emphasis is on getting what the users need rapidly. Diligence may be incomplete. The firm may not get the lowest price or generate sufficient options from which to choose or buy the first-best solution, but rapid early-stage revenue growth can make up for these deficits. At least they prioritize end-user needs.

A company enters the exploit phase when it switches focus to managing growth and fulfilling demand for the product they have built during the explore phase. It implements processes designed for rapid completion and execution of tasks rather than on the accretion of value. In procurement, the objectives (and the KPIs) shift to narrow in on compliance, consistency, and efficiency. However, there are very few later stage organizations that incorporate feedback loops to assess how well the end user’s needs have been addressed and to measure the return on investment.

Currently, the entire global economy is undergoing massive change. End user requirements are changing as are the options available. It is imperative today to retain the user-focus of the explore phase. Central to this is collaboration and communication between the various stakeholders of the procurement process. At the same time, efficient processes and thorough risk management are imperative given the intensity of global competition.

In the explore phase, firms should implement a process much earlier than they do in practice. In the exploit phase, procurement should not forget that their primary allegiance is to their internal customers who are responsible for generating real economic value.

Traditionally, the buyers of procurement technology and services have been later stage companies because of the explore-exploit dynamic, so incumbent solutions tend to be over-priced and over-featured. They are not designed for companies in the explore phase. Incumbent solutions do not promote collaboration at all. They are built to support established practices with little to no capability to incorporate the needs of end users and various stakeholders

That’s why we built EdgeworthBox. We have built an easy-to-use platform for procurement that enables firms to establish robust processes when they are in the explore phase and allows firms to retain the collaboration and user-focus when transitioning to the exploit phase. We would love to talk to you about your procurement challenges. Please reach out to us at chand.sooran@edgeworthbox.com or naresh.rao@edgeworthbox.com.

Here’s MIT Nanda talking about the current state of affairs:

“Despite $30–40 billion in enterprise investment into GenAI, this report uncovers a surprising result in that 95% of organizations are getting zero return. The outcomes are so starkly divided across both buyers (enterprises, mid-market, SMBs) and builders (startups, vendors, consultancies) that we call it the GenAI Divide. Just 5% of integrated AI pilots are extracting millions in value, while the vast majority remain stuck with no measurable P&L impact. This divide does not seem to be driven by model quality or regulation, but seems to be determined by approach”

The study also states that the key features of the successful 5% are a focus on a few specific business functions viz. BPO/ Back-office operations and customization of the tools to focus on business outcomes. Vendors who succeeded in these areas are reportedly securing multi-million-dollar engagements rapidly.

The unsuccessful majority leverage tools like ChatGPT but fail to handle integration complexity, fail to align with daily operations and existing workflows, and are slow at contextual learning.

We have seen this movie before with earlier avatars of digital transformations.  However, we firmly believe that the Procurement Technology space is ideal for getting the sought-after success with Enterprise GenAI.

Jon Hansen, the procurement guru – a prolific commentator on the state of procurement technology – summarized what was promised with ERP. It seems eternally relevant:

“Enterprise-wide integration

Automated workflows

Significant cost savings

Process standardization”

Here is what he identifies as the fatal conceit of procurement technology:

“At the heart of this change is a growing realization of a fundamental truth that process and not technology is the driving force behind a successful e-procurement initiative.”

Most procurement technology is built for the large enterprise. It is neither suitable nor economic for small and medium-sized enterprises (including semi-autonomous divisions within larger organizations, such as IT). People, including Hansen, have made the analogy that many of the leading systems are like a Ferrari. One wouldn’t buy a Ferrari SF90 Spider to haul rocks or take the kids to school.  A more suitable vehicle might be a Ford F150 or a Hyundai Santa Cruz which is not only cheaper but may more appropriately serve the need of a family or small business.

Sometimes, it pays to start small and simple. This, in turn, provides a flexibility that is necessary to function as a business. Yet, the existing suite of procurement technology takes a one-size-fits-all approach. They are built for the large enterprise with plenty of large enterprise features and a large enterprise price tag. Many of them are older. They lack a contemporary user experience. They bolt on AI as an afterthought, not as a central part of the functionality.

There are so many players in the procurement technology space because there are so many different types of buyers.

In procurement technology, there need to be tools targeted for small to medium-businesses that seek to transition from running RFPs with emails and spreadsheets to running a lean operation leveraging the most appropriate AI-enabled capabilities.

EdgeworthBox is a flexible platform of tools, structured data, and community focused on executing RFPs. Our AI suite integrates and adapts to existing customer workflows, improving rapidly with usage by propagating best practices, replicating successful approaches, and significantly enhancing collaboration across business functions

We’d love to hear from you. Please reach out. And watch this space.

A group purchasing organization (GPO) is a similar type of club. It is focused on business-to-business buyers, not individual consumers. For each category it covers, the GPO will have a limited number of suppliers. As in the case of Costco, this enables the GPO to concentrate the force of its group purchasing. It still needs to offer some choice, but it restricts the number of options.

All GPOs charge the supplier a fee; most of them charge buyers a fee. The GPO negotiates a volume-discounted contract with each supplier that contains terms and pricing for the supplier’s product that are preferable to what an individual buyer could obtain.

A general rule of thumb is that businesses can save 20 to 25% by using the same contract the GPO negotiated. The suppliers pay the GPO a fee, typically between 1% and 5% of the value of each sale.

Some GPOs  focus on a particular sector such as healthcare; others consist of members from a variety of industries. In this latter case, the buyers purchase certain goods and services in common. This may be more applicable to indirect expenditure, e.g., for office furniture or stationery.

In a sense, buyers outsource their procurement function for the categories they purchase via the GPO. The GPO learns the requirements of its members, researches the supplier base, conducts some sort of selection process, and negotiates the final contract. When the buyer is ready to execute, she can complete the transaction in a matter of days. All that remains to be done is to choose a supplier from the GPO’s short list for a given item. Ideally, the GPO is fully informed of developments in the category and, depending on the needs of their members, can incorporate other dimensions of spending such as diversity.

The GPO’s extension of the buyer’s procurement function is especially attractive for smaller firms that lack a sophisticated procurement department or for ones that prefer to use their internal resources on more strategic projects. GPOs specialize in purchasing, so we may infer that they employ best practices and they have access to better data with which to make decisions.

Earlier, we referred to a selection process that the GPO uses to choose suppliers for its short list in a particular category. The most logical one to employ would be a competition in the form of a Request for Proposals (RFP). In fact, members may assume that the GPO has used an RFP to vet suppliers with which to negotiate a contract subsequently. This is often not the case.

“GPO/Supplier direct contractual negotiations often eliminate the Request for Proposal (RFP) process, saving additional costs for both suppliers and members. Additionally, this provides overall speed-to-savings for members and speed-to-revenue for suppliers. For private equity companies, these cost savings are efficient, sustainable improvements that require minimal effort.”

Buyers, in effect, use the GPO to short-circuit sourcing best practices. The GPO may just pick a supplier based on the GPO’s own interests and enter into negotiations directly. It is process arbitrage.

“In summary, the core value proposition of GPOs is providing pre-negotiated contracts that eliminate the need for their members to conduct lengthy RFP processes with suppliers. Instead, GPOs follow their own methodologies to vet, select and directly negotiate contract terms with suppliers from across their portfolios, replacing RFPs with their purchasing expertise and scale. RFPs may be used by organizations when initially choosing a GPO partner, but not in the GPOs’ regular supplier contracting processes.”

GPOs develop a list of buyer requirements and search for a short list of relevant supplier solutions. It is a one-size-fits-all approach.

However, the bulk of the revenue GPOs collect comes from suppliers. Member fees are incidental. They may exist to convince the buyer that they are obtaining something of value, masking the possibility that the buyer is the product being delivered to the supplier, in fact. Buyers may be unaware of the fees the GPO earns from suppliers.

The GPO’s incentive is to pick contracts that will be used most frequently and in the greatest volume. After all, there is a fixed cost to selecting, vetting, onboarding, and contracting with a supplier. The kinds of contracts that are most likely to fit this description are consumable inputs. The best members are the largest buyers. When supplies get tight, the big get allocations, the small get waitlisted.

What does the supplier receive from these arrangements? The supplier gets a sales channel (without having to go through an RFP) in which the sales cycle is accelerated. This is certainly worth paying a 1-5% commission to the GPO and discounting already grossed-up list prices.

GPOs get paid by vendors to deliver customers by arbitraging sourcing best practices.

The GPO business model exists because of the historical difficulty in coordinating purchases across different buyer organizations. If running a single-buyer RFP process is difficult, the complexity of a multi-buyer RFP compounds exponentially. Buyers want simplicity and speed. Implicit is the assumption that price is the one dimension around which they should optimize. GPO members sacrifice flexibility because they have limited supplier choice. They give up problem-solution fit because the GPO’s assessment of requirements in a category (which may be dictated by their supplier customers) may not align with those of the individual buyer. One size does not fit all.

A better alternative to the GPO would digitize the hard part: coordinating buyers in a procurement context. It would enable smaller groups of buyers to execute joint purchases.

There’s nothing wrong with the common contracting model, as long as it’s understood to be a common contracting model and the contract is the fruit of an RFP process. NASPO ValuePoint executes this wonderfully in the public sector space.

EdgeworthBox simplifies procurement. Organizations can coordinate their own joint purchases in a contained space.

Give us a shout. We love talking about this stuff.

How do sophisticated investors behave in financial markets?

The professional acts on her assessment of the tradeoff between risk and reward.

She acts knowing that she won’t be right every time. Her edge, if she has one, comes from, at least, two things.

One, she needs to have a good method for estimating the risk of permanent loss and the potential to lock in gain in an individual situation.

Two, she must have the discipline to invest only when the tradeoff skews predominantly in her favor, i.e., when the potential gain far exceeds the permanent loss she may incur if things don’t work out.

We could add other factors such as her assessment of the probability of getting a favorable outcome vs. an unfavorable one. She needs to be disciplined about selling when the valuation hits her target or when counterfactual evidence emerges to invalidate her original view. Or we could consider her willingness to withstand the vicissitudes of the market’s ups-and-downs so that she doesn’t get forced into selling into weakness.

These and other considerations only act to modify the core two dimensions of edge. Her evaluation of the risk/reward in any individual situation and for the portfolio as a whole is a continuous process. Her buying and selling is an act of constant, conscious discipline.

It sounds easy, but it’s difficult.

For example, some people may have a good ability to estimate risk and reward, even as they lack the patience to act only on the right kind of setup.

Warren Buffett compares investing to a game of baseball in which there are no called strikes. You can only strike yourself out by swinging at the wrong pitch. In Buffett’s game, you wouldn’t swing without a strong belief that you would hit a homer. You would wait for the fat pitch.

It’s a Law of Large Numbers exercise. This means investors have to be confident enough in their edge to be able to stick with their system even when they endure a losing stretch. Their edge will work over a long enough period of time, if it’s real. Of course, you won’t know if you have a genuine edge until you have been in the game for a while. If you have a bad run at the beginning, you might abandon a winning approach before it starts to pay off.

It’s incredibly difficult.

People are weak and impatient and lack faith in themselves. It’s rare to have someone with an authentic, disciplined edge.

There is an edge to taking risk in an organization just as there is in investing in capital markets. The objective is different, though. The risk/reward tradeoff isn’t about maximizing profit; it’s about generating political capital.

Large organizations make decisions every day. They have problems to solve. Some of these choices are big and some of them are small. Some of them work out and some of them fail. For example, a large organization may elect to implement an Enterprise Resource Planning system. ERPs (even just individual modules) are notoriously difficult to implement, not to mention extraordinarily expensive. Or organizations may try to replace a system that works because, as the kids say, “reasons.” The current failed FAFSA rollout is a good example of what can go wrong.

In large organizations, people do things to advance their own interests. If Alice can lead the successful implementation of a system that improves the output of the firm or makes her boss look good or that replies to a demand from the Board of Directors, then Alice increases the size of her political capital account. This puts her in a better position to be promoted or to see her compensation increase. Maybe she can use her win to get a better job elsewhere. That’s the reward.

Alice is like an investor who plunges into the stock market with borrowed money. If she wins, her bank balance goes up. If she loses, the institution that lent her the money loses. Alice moves on to the next trade. If she loses a lot of money, nobody will lend to her anymore. Or it might cost her more to finance the next trade.

Except in the large organization context, it’s about Alice’s political capital. These are made up of her power and her compensation.

The risk is that the project doesn’t go well and the firm suffers increased costs or foregone revenue. These may or may not translate to a depletion of Alice’s political capital account. Perhaps she’ll be lucky and it blows up after she moves to her next role (or, ideally, to another company). But if she’s still in the seat when it fails, she will suffer. She may even lose her job over it.

In both cases, the risk/reward calculus focuses on Alice. Alice can decide to sit on the opportunity or she can foist it on someone else, say a rival peer.

Alice, if she is a canny operator, will take on only projects with a high likelihood of success, in which the consequences of failure are small (or deniable) and the upside from success are personally large and tangible. People have made their careers from leading these kinds of large projects.

Naturally, this risk/reward calculus is a function of the organization.

Culturally, if there have been a number of heralded previous successes, Alice’s evaluation of the risk/reward tradeoff may be biased in favor of overestimating the reward and underestimating the risk. There are many examples of people who have benefited personally from leading a successful project while there is scant evidence of people who suffered from project failure. Alice swings at every pitch. This is like the momentum investor who chases the stock market higher.

On the other side, if the corporate history is littered with high-profile project failures that have killed or maimed individual career trajectories, Alice’s sense for the risk/reward will tend towards the pessimistic, overemphasizing the risk while underestimating the reward. She won’t swing at any pitches, fat or skinny. She just hopes that there is some miracle way for her to walk to first base. If there is an uncertain benefit from propelling change, but the consequence of failure is perceived as career death, no one will do anything requiring initiative. This is a bear market in initiative.

An organization with a recent history of winning takes more risks. One with a recent history of disaster is risk averse. The principals in an organization have a flawed edge because their willingness to swing is either manic in a winning culture or depressed in an unlucky one.

As they say on Wall Street, “when they’re yelling, you should be selling, and when they’re crying, you should be buying.”

These kinds of distortions create opportunity as any value investor will tell you.

Assuming that there is nothing structurally wrong with the organization, making it prone to failure, the valiant Alice should prefer setups where the organization is coming off a run of failed projects. If Alice can succeed where others have failed, she may reap orders of magnitude more plaudits than in an organization in which success is seen as automatic. She can argue credibly that her project succeeded because of her leadership not because of the organization’s culture or resources or history. She will be seen to have made things happen despite these artifacts.

What else can Alice do to tilt the odds in her favor?

She can take a scientific approach, starting with small experiments designed to gather data with which she can build the project from the ground up.

Managing execution risk like this is not easy.

“Acting like a scientist is difficult for leaders because it can challenge their legitimacy. Undoubtedly, that’s because someone’s position in the corporate hierarchy is often assumed to be the result of experience and a track record of successful moves and ideas. Senior executives live in a feedback loop of positive reinforcement that makes them unlikely to question the foundations of their decisions. The scientific method, in contrast, requires intellectual humility in the face of difficult problems and relies on an objective, evidence-based process, rather than predominantly personal insight, to frame and address decisions.”

It means questioning the assumptions that underpin the status quo. Just because everyone else is buying System X doesn’t mean it’s the right choice for Alice’s organization (or any organization, for that matter). It means thinking independently. It means being open to different possibilities.

“When business leaders adopt this mindset, their biases and errors won’t get in the way of finding the truth. They will employ reason, demand evidence, and be open to new ideas. In scientific practice this means seeking independent confirmation of facts, placing more value on expertise than on authority, and examining competing hypotheses. Above all skeptics question assumptions. They ask, ‘Why do we believe this?’ or ‘What is the evidence that this is true?’ History is full of examples where such skepticism helped overturn commonly led ideas and led to important scientific advances.”

Maybe the small vendor that is willing to build a product around Alice’s problem set is a better solution than a large company with a pre-built approach. Maybe it’s sufficient to solve a small set of problems. Maybe Alice’s organization is thinking about the problem the wrong way.

Alice should get information wherever she can.

“In business, ideas for hypotheses can come from multiple sources. A good starting point is customer insights derived from qualitative research (focus groups, usability labs, and the like) or analytics (data collected from calls to customer support, for example). As we have seen, hypotheses can also be inspired by anomalies, which can be found in everything from overheard conversations to successful practices that deviate from the norm at other companies.”

Alice can do three more things to improve her personal risk/reward profile.

One, she can enlist others into her project. Let’s say that her colleagues Bob and Carol each have related projects. If the three of them pool their risk and jointly run the three projects, then they can diffuse the downside should anything happen on any individual project, even as they improve their chances of being part of a winning project. In fact, the lessons they learn from each project can make this portfolio more likely to succeed. Risk pooling is a winning strategy.

Two, Alice should break the project into bite-sized pieces that build on one another. This means that she proceeds only when successful. If any individual step is deemed a failure, then she can abandon the project or she can redo the step until successful. Each individual step is contained and reversible, but the scale of the entire project is large. There’s a reason they call it the Big Bang.

Three, Alice can change the definition of success to make it more likely that the project is deemed a success in the context of the internal competition for political capital among peers within her organization. She can frame the project as an information gathering exercise (at least initially). Combine this with outsourcing execution (and political risk) as much as possible and Alice has transformed the project into a Shark Tank where she is the investor and the risk of failure (at least politically) falls on the heads of the outside contractors.

Alice can increase the likelihood of a fat pitch.

If Alice succeeds, she is seen as an operating hero. If she fails, well, we learned and it was really the outside vendor’s issue. But we now know what approach not to take and we can experiment with another.

The best setup for taking risk in a large organization is in one with a history of loud, public failure because the risk/reward calculus is distorted. People underprice reward and exaggerate risk. There is less competition for the best projects. Even then, the leader can manage her exposure by pooling her risk with others, chunking, outsourcing, and recategorizing execution. Eventually, enough of these experiments strung together will constitute massive progress. Failure at any intermediate sub-step is something to blame on the contractor.

No risk, no reward.

April 2024 | New York, NY – EdgeworthBox, a procurement technology company, today announced it joined the Amazon Web Services (AWS) Partner Network (APN) as an AWS Public Sector Partner. In addition, EdgeworthBox announced that the EdgeworthBox platform passed the AWS Foundational Technical Review (FTR). Passing the AWS FTR validates that EdgeworthBox meets the best practices for security, reliability, and operational excellence.

As an APN member, EdgeworthBox is positioned to benefit customers with all that AWS has to offer. EdgeworthBox can now leverage their relationship with AWS to accelerate customer adoption of cloud-based procurement technology. For some, this means leapfrogging the use of email and spreadsheets to a dedicated contemporary framework for the management of the reverse auction process involving RFPs, RFQs, and RFIs. For others, this means augmenting existing technology approaches with a secure, cloud-based functional procurement technology solution. Also, this will spur social procurement: engaging and developing suppliers from historically disadvantaged communities with a simple, accessible platform. EdgeworthBox has both a global presence and a separate, dedicated Canadian instance on AWS.

“We’re thrilled to be part of a program in which AWS invests in the growth of its APN members, enabling us to reach a broader audience, and benefiting from the tremendous reach of the AWS Marketplace for cloud-based solutions. EdgeworthBox seeks to help public sector organizations at every level of government, in addition to companies in the private sector, simplify and improve the way they purchase and finance goods and services from third parties. Working with AWS extends the EdgeworthBox promise of the right solution, from the right provider, at the right price to a wider audience with an accessible channel,” said Chand Sooran, Founder & CEO, EdgeworthBox.

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About EdgeworthBox: EdgeworthBox is a set of tools, structured data, community, and market intelligence that streamlines the way businesses purchase goods and services. It makes it easy to execute RFPs, RFQs, RFIs, or any other kind of reverse auction, while promoting collaboration, both internally and externally. Companies use EdgeworthBox to replace the chaos and complexity of email and spreadsheets to manage reverse auctions or to insert it as a complementary layer that improves an existing procurement technology installation.

EdgeworthBox                                                                                  CONTACT DETAILS

370 Jay Street, 7th Floor                                                                      Sales Department

Brooklyn, NY 11201                                                                sales@edgeworthbox.com

SkyFly Solutions is excited to partner with EdgeworthBox, as an exclusive implementer, to bring a new Social Procurement Platform to the Government of Canada! Canada can now procure the EdgeworthBox Platform directly from the SLSA. As an Aboriginal Business certified by the Canadian Council for Aboriginal Business, SkyFly Solutions applauds the Canadian Federal Government’s efforts to increase and more accurately account for goods and services procurement through Indigenous Business and are eager to help the Government of Canada meet and expand on its social procurement objectives.

– Graham Crate, Director Service Delivery, SkyFly Solutions.

“It’s exciting to work with the Government of Canada and our partner SkyFly Solutions as the federal government leads by example in the promotion of social procurement. This SLSA listing will make it easier for agencies to work with diverse suppliers, while ensuring value-for-money for the taxpayer. Supplier diversity is critical not only as a policy tool, but for procurement risk management and economic development.”

– Chand Sooran, Founder & CEO, EdgeworthBox.

About SkyFly Solutions: SkyFly Solutions is a proud Canadian Indigenous business, committed to delivering leading IT solutions with a focus on transformational and digital projects. With roots in Indigenous heritage, we bring this unique perspective to every endeavour we undertake. We are recognized and certified by the Canadian Federal Government under the Indigenous business directory and by the Canadian Council for Aboriginal Business as a Certified Aboriginal Business.

About EdgeworthBox: EdgeworthBox is a set of tools, structured data, community, and market intelligence that streamlines the way businesses purchase goods and services. It makes it easy to execute RFPs, RFQs, RFIs, or any other kind of reverse auction, while promoting collaboration, both internally and externally. Companies use EdgeworthBox to replace the chaos and complexity of email and spreadsheets to manage reverse auctions or to insert it as a complementary layer that improves an existing procurement technology installation. EdgeworthBox is an AWS Public Sector Partner.

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.

First and foremost, they must obtain value-for-money in purchasing solutions that solve problems their organization faces. This means buying the right solution, from the right supplier, at the right price. This is part of a broader mandate. Private companies exist to generate profitable cash flow for their owners. Government agencies and non-profits must husband their resources in order to deliver the greatest social value with what they have been given.

These B2B buyers also have a duty to the community they serve and in which they operate. They must be conscious of the impact they have on the world and endeavor to make it as positive as possible. The best businesses are conscious of their full set of stakeholders including vendors, employees, customers, and neighbors, at a minimum. This is good corporate citizenship.

When we speak about buying the right solution, from the right supplier, at the right price, it means that we have found the good or service that has the best fit for our problem and we don’t pay more than a fair and reasonable price. But it also means that we want to ensure that, where possible, we are sensitive to who the supplier is. Ideally, our business will help the supplier develop their capacities and their capabilities and to obtain financing, even as we as buyers get what we need.

When we think about social procurement, we talk about what we would need to do to increase our purchasing from businesses owned, operated, and controlled by members of historically disadvantaged groups. Often, buyers interpret this to mean purchasing from them directly, i.e., the diverse businesses are our counterparties.

The majority of diverse suppliers are small and medium-sized businesses. In a country like Canada, 99.7% of businesses were small and medium-sized. They account for roughly half of GDP. If you make it easier for small and medium-sized businesses to sell to you, even indirectly, then the diversity will follow, naturally. So, we should think of the problem as one of engaging small and medium-sized vendors.

These firms may be too small for us to purchase from them directly. We’re more likely to buy from someone who then subcontracts a portion of the business to one of these diverse suppliers, if at all. We would struggle to know how much of our third-party spending trickled down to these suppliers in most (if not all) cases. This makes the prime contractor’s role that much more significant. This gives the large businesses much more sway over the small and medium-sized businesses than is desirable, potentially.

Much has been written about behavioral economics over the past thirty years, looking into the psychological underpinnings of how human beings make decisions. Core to this research is the elucidation of a host  of biases that lead us to make sub-optimal choices. For example, confirmation bias means that we look post facto for evidence that a decision is correct. Or there is loss aversion in which the disutility of losses is greater than the utility of commensurate gains. Or the mere exposure effect that makes us prefer things that we know well to new things. There is in-group bias that leads us to favor people in our in-group over those in our out-group. The list goes on.

Large prime contractors may prefer to stick with vendors they know. The mere exposure effect means that incumbents have an advantage, further distorted by the natural tendency to prefer people who look like us and who speak like us and act like us. The thin margins on many projects, such as construction projects, make primes more sensitive to the potential for loss from including an unknown subcontractor than they are to the gain from increased efficiency across the chain or the gain in capacity that enables scaling project delivery. Large company confirmation bias may make them less likely to see what is wrong with the status quo, preferring an if-it’s-not-broke attitude.

Overcoming these distortions in decision-making as buyers and as contractors means slicing through these behavioral missteps. It’s difficult work, but it makes us all better off.

Instead, let’s reframe the question. Imagine a world in which previously small and medium-sized suppliers (many of which are owned, operated, and controlled by members of historically disadvantaged groups) have grown large enough to compete directly for our business. What would it have taken to get them to that point?

As the ultimate buyer, we would want to make the most of our third-party expenditure to help these small and medium-sized suppliers develop.

Full visibility into the supply chain on any given project helps us understand how our spending flows through the waterfall to the different levels of subcontractors. It would also help us combat the behavioral distortions at every level once the prime contractor knew that we, the buyers, were watching. The knowledge at every level that the ultimate buyer could see with complete transparency the full supply chain would motivate the prime contractor to compete subcontractor selection at every level, ideally with an open, level process that landed the best company for the job at each level.

Ideally, this would attract new SMEs as subcontractors. The potential benefit for the prime contractor extends beyond our project to their subsequent bids, as well, if new SMEs get invited to compete again based upon their now-proven  experience.

Transparency would also improve our understanding of risk in the supply chain. Think of the chain of contractors from the prime contractor down to the lowest level of subcontractors as a game of Jenga. The failure of intermediate pieces may lead to the failure of the project. Being able to identify potential weakness early enables better risk management.

There should be a way for the participants across the chain to interact with one another for mentorship. Larger contractors can help smaller subcontractors develop capacity and capabilities. They could help the smaller subcontractors obtain financing. They could help the smaller companies grow. This makes the SME suppliers more attractive as future partners.

Small and medium-sized businesses are vital to the development of the economy. Buyers should leverage their third-party spending to include development of these smaller subcontractors as part of the value delivered by the prime contractor. The tool to make this happen is visibility which brings its own additional benefits, including enhanced risk management.

We’re all for big business, but small and medium-sized businesses are a vital component of a growing economy.

This is what we have built at EdgeworthBox: a set of tools, data, and community that makes it easy for primes to light up the entire supply chain .Give us a shout. We’d love to hear from you.

Warren Berger is a journalist and speaker who talks about thinking and creativity in a podcast with Farnam Street.

“There’s a great definition that I came across from this group called The Right Question Institute. They’re a non-profit group that studies questioning. They describe questioning as a tool that enables us to organize our thinking around what we don’t know.

“There’s a lot of stuff out there we don’t know. Through questioning, we can attack it, and the different forms of questions you use will allow you to come at this unknown thing from a different angle.”

It is too easy to assume that we know the correct question and to jump into answering it.

Answering may actually be the easy part. The more difficult and more important thing to accomplish is to figure out what the question should be. This is especially true in an Internet age (and now an AI era) where we have what seems like unlimited information (and robotic judgment) at our fingertips.

To get to the right question involves, ironically, asking a whole set of other questions first. We need to fill in the empty areas on our map. We need to add as much dimensionality to our understanding of the problem to be able to say that if we do X, we obtain Y in response, so how do we make X happen? But what we need most is confidence that if we obtain Y, we are acting to improve our situation the way we want it to improve and we realize the underlying goals we set for ourselves.

Ask the wrong question, obtain the wrong outcome.

Let’s consider social procurement.

Here’s the definition from the City of Toronto:

“Social procurement is the achievement of strategic social, economic and workforce development goals using an organization’s process of purchasing goods and services. The City’s Social Procurement Program is comprised of two components: Supply Chain Diversity and Workforce Development.

“What is Supply Chain Diversity?

“Supply Chain Diversity is a business strategy that promotes a diverse supply chain in the procurement of goods and services for any business, not-for-profit, government or private organization. In the City’s Social Procurement Program, Supply Chain Diversity applies to Departmental Purchase Orders from $3000 to $100,000.

“What does Workforce Development mean?

“Workforce development is an interconnected set of solutions to meet employment needs. It prepares workers with needed skills, emphasizes the value of workplace learning and addresses the hiring demands of employers. In the City’s Social Procurement Program, Workforce Development requirements will apply to Request for Proposals and tenders over $5 million.”

What is the problem we are trying to solve by implementing social procurement?

I suspect that a lot of people will wave their hands about the benefits of diversity and the importance of a level playing field in a multi-cultural society. They are correct at a general level. But that doesn’t justify it as a procurement policy, per se. We could address these issues in other ways such as philanthropy, for example.

When it comes to social procurement, the more appropriate question we should be asking is this: how can we reduce risk and increase capacity in our value chain by ensuring that our supplier partners and their contractors have a fair and open process that encourages suppliers from all backgrounds to participate in our third-party spend, directly or indirectly. The ancillary benefits to the disadvantaged communities will come on their own if we get this right. These include economic empowerment, workforce development, and a rise in the general level of welfare. By acting in its economic self-interest to reduce risk and increase capacity, the large purchasing organization will end up doing the right thing.

It’s too easy to rage against the dying of the light and to descry the current inadequate and less-than-proportionate participation of vendors from disadvantaged backgrounds in our direct supplier ken. Buyers need to have visibility into their chains to know how risky they are, in any event. (Something almost none of them has.) With this insight comes the opportunity to de-risk those chains by forcing contractors at every level to compete the business and to develop the capacity, capabilities, and capital of their sub-contractors. Transparency will be the great motivator here. One reason why these supply chains have been slow to diversify is the opacity of the current set-up.

What is the actual problem then?

Buyers don’t have visibility into the supply chains and value ecosystems. What happens if we fix this problem? We can see precisely how diverse our supply chains are. And our contractors can, too. Our contractors will know that we know. So we have an opportunity to de-risk them by fleshing them out, including with diverse suppliers. Our subcontractor will have no excuse. Comply or get off the boat.

This is what we have built with EdgeworthBox. Our set of tools, structured data, and community helps B2B buyers buy the right solution, from the right supplier, at the right price. It also can be used in a way to expose the supply chain on a project or set of procurements with full visibility and interactivity. This leads to lower risk and greater effectiveness when it comes to social procurement by cracking open what are often fixed supply chains to let in suppliers who can develop their capacity and capabilities. Maybe even throw in some mentorship. If you’re interested in learning more or if you just like social procurement, please shoot us an email. We’d love to hear from you.

“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions. But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.”

For a Type 2 decision in a procurement context, we can imagine executing a pilot of a software program. It will cost much less than what a license or subscription would cost. The buyer can test it out and see how it works, how responsive the support is, how willing the vendor is to make changes based on the experience, etc. If the pilot project doesn’t succeed, then no harm, no foul. Uninstall the software or stop using it and move on. You’ve picked up inexpensively some valuable information that may or may not come in handy in the future.

A Type 1 decision in the Bezos framework involves purchasing something that the buyer is going to live with for a long time, involving significant expense. For example, it could involve purchasing capital equipment for a new semiconductor manufacturing facility. This choice will determine the kinds of chips the fab can produce. Will these be in demand? For how long? Will the facility be able to earn a high enough price with a sufficient volume to generate at least the required rate of return? How vulnerable is this type of chip to the cyclicality that stalks semiconductor markets? This needs to be a thoughtful decision.

In his letter, Bezos goes on to descry the natural tendency to bureaucratize everything by approaching too many things as a Type 1 decision.

“As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention. We’ll have to figure out how to fight that tendency.”

As Farnam Street points out, it’s not a dichotomy between reversible and irreversible; it’s a continuum. You can always get out of a decision. There is a cost to be paid, but you always have an exit. The higher the cost, the more difficult the decision is to reverse, putting it closer to the irreversible end of the spectrum.

So, the rational thing to do is to adapt your process to the type of decision.

“Make reversible decisions as soon as possible and make irreversible decisions as late as possible.

“When decisions are reversible, make them fast. Your biggest risk is dragging your feet and not making a decision. The cost to acquire additional information isn’t worth the effort.

“When decisions are irreversible, slow them down. The biggest risk is making the wrong decision. The cost to get the information we need to reduce uncertainty is worth the time and effort.”

To try and map how this logic might work in procurement, let’s put on our game theory hat.

Imagine a game in which we have to guess the picture underlying each of a series of ten puzzles. Every player gets a different set of puzzles, some of which may overlap partially across players.

Let’s assume that in this game we get very few points for guessing the picture for small puzzles correctly and we get a tremendous number of points for identifying the picture of large puzzles.

The more pieces of an individual puzzle we have, the easier it is for us to determine what its picture may be.

According to the rules of the game, we have a budget of time and money. With the budget, we can purchase additional pieces for any puzzle. We don’t have to purchase pieces, but we can.

Players can only make one guess. So they wait until they’re comfortable.

The winner of the game is the player who can identify correctly the greatest number of puzzle pictures in a given period. We’ll break ties by comparing the amount of remaining money each tied player has left, with the individual who finishes the game with the most money winning.

Some players will have an advantage because they may have played one or more of the puzzles previously. They’ll be able to recognize pieces faster and they can skip ahead, moving from one to the next.

What is the optimal strategy in this game?

You would spend most of your time and money on the big puzzles. The small puzzles aren’t worth more than a cursory effort.  For these, you can make an educated guess and move on. With respect to the larger puzzles, she can try and purchase more pieces, conscious of the trade-off. This is where judgment comes into the picture.

Let’s throw four twists into the game.

Twist #1: you can talk to other players and ask them questions. Since everyone is playing different sets of puzzles, it might make sense to collaborate. Player A can help Player B and Player B can reciprocate potentially on a subsequent puzzle. There is no cost to cooperation.

Twist #2: you have a private database of every puzzle you have played in the past. It is easy to search through. The more puzzles you have played in the past, the more likely you are to find one in your history that you are now being asked to solve.

Twist #3: everyone can access a community database of certain puzzles that others before you have seen.

Twist #4: you can pool your efforts with other players if you see that they are working on what appears to be the same puzzle as you.

These twists now change the strategy a rational player should employ.

In addition to the basic strategy of focusing on the larger puzzles, the player should scan the databases for signs of the current puzzle under examination. When it comes to the larger puzzles, if she is making progress, then she should continue. If she hits a roadblock, instead of switching puzzles, she can ask for advice or seek collaboration. These preserve budget and they speed up the time.

Naturally, the more experienced players will have seen more previous puzzles and will be more adept at using the databases. But anyone can employ collaboration, even (and especially) the novices. The collaboration levels the playing field potentially more so than the databases which require familiarity.

How does this game translate to procurement?

Procurement is like trying to solve a puzzle. The buyer wants to have as many pieces as possible to identify the correct picture. However, too often they don’t see enough competition on price and solution and they end up taking a stab in the dark.

It’s best to focus the most procurement department resources on the larger purchases.

Ideally, we’d have structured data of prior procurements: the RFPs the buyer issued, the proposals they received, the vendor they selected, and the contract they signed, in addition to structured data on procurements in the public sector.

It’s best to get information from other buyers. And, if possible, to purchase jointly with other buyers who want to purchase the same products we do. So there should be some sort of networking and collaboration tools built into the process.

This is what we have built at EdgeworthBox. We have a set of tools, structured data (in public and private repositories), and community to help B2B buyers purchase the right solution, from the right supplier, at the right price. We are changing the game to make it easier andRFP, moreRFP, efficient. Give us a shout. We’d love to hear from