How Can B2B Buyers Collaborate Across Organizations?

How can B2B buyers collaborate across organizations? Why is joint purchasing something B2B buyers should consider?

Before the trade skirmishes and the Pandemic and inflation and war in Europe, the mandate for procurement was simple: cut costs. The oppressed, underappreciated procurement department labored to squeeze supplier pricing, even as they were excluded from important strategic discussions their expertise could have improved. Procurement as a function was difficult, time-consuming, and lacked status internally, notwithstanding the myriad, failed reports from consulting firms that every year would be the year in which procurement became a strategic role.

Even before the incessant supply chain turmoil, the buyer’s journey had changed. The Internet made information more readily available to all stakeholders. There was less reliance on suppliers for market intelligence and there was greater independence from the in-house category expertise in the procurement department. End users through senior management demanded greater influence over purchasing decisions, armed with facts and opinions discovered online. Building consensus remains difficult.

For procurement, there was no real sense of affiliation outside of the buyer organization. Buyers from one entity rarely (or only coincidentally) consulted with their colleagues from other organizations to share information and data.

The buying cycle was long and painful, an experience often made worse by the poor tools procurement staff had to use. Unable to justify the expense of sourcing modules built for larger, frequent buyers, many small and medium-size groups (including those inside larger enterprises) made do with legacy software or with email and spreadsheets. Even the large enterprise solutions needed supplementing.

Often, the biggest problem was a paucity of suppliers responding directly to the reverse auction in the form of an RFP or RFQ. An auction that fails to attract enough participants is a failed auction for its inability to generate sufficient competition on price and solution. Buyers end up overpaying for what can be a second-best solution.

Procurement lacked status. Procurement lacked affiliation. Procurement lacked the right tools.

Now, we are in the early innings of a massive disruption of all things supply chain in which the Board and the C-Suite are obsessing over the risk of the procurement decision. Procurement is in the spotlight.

Here’s a profile of Conagra in the Wall Street Journal:

“Mr. Marberger said he is spending about 30% more time in his role meeting with the procurement team to evaluate commodity costs, compared with January 2021. They now meet frequently throughout the month. Before the surge in inflation they met once a month.”

Collaborative purchasing in which procurement staff from different buyer organizations cooperate on acquiring specific goods and services addresses all these problems.

The typical way buyers have done this is with a GPO: a Group Purchasing Organization. Here’s a good definition from Omnia Partners:

“A group purchasing organization (GPO) combines the purchasing power of collective businesses to leverage better pricing, service levels, and account representation from suppliers. Leveraging a GPO increases your buying power and simplifies your buying process. The wide-reaching network of a GPO is challenging for an individual professional to match.” [Emphasis added]

The Group Purchasing Organization coordinates sourcing: searching, vetting, and screening suppliers and their offerings for a particular problem. The GPO will negotiate a contract on behalf of its members; all members enjoy the same terms and conditions, with the flexibility to add an appendix to the contract to reflect minor but necessary buyer-specific arrangements.

There are at least three obstacles to setting up a GPO.

First, there needs to be a network of buyers.

Second, the GPO requires suppliers that are willing to engage with this group of buyers in exchange for higher volumes. The GPO needs to be able to deliver them volume.

Third, suppliers and buyers must have a mechanism for collective sourcing and contracting.

Get this right and sourcing is faster, simpler, and more competitive on price and solution. There are no more failed auctions.

Traditionally, GPOs are private companies or non-profit entities organized for the purpose of coordinating this joint sourcing activity. The GPO charges its members fees for processing the allocation of benefits (e.g., in the form of rebates from suppliers once the GPO hits pre-set volume thresholds), as well as other administrative functions.

Buyers and suppliers pay these fees in exchange for their access to better pricing and an increased diversity of solutions, and in exchange for larger sales opportunities, respectively.

Naturally, GPO activity tends to focus on indirect expenditures: spending on goods and services that are ancillary to the cost of goods and services. For example, a chemical company’s direct spending would include its feedstock. This is strategically vital. The chemical company’s indirect spending spans a wide variety of things such as office furniture, IT, or catering services. These are necessary for the business to operate, but they are not particular to the company’s core reason to exist.

Most commonly, the GPO will conduct a reverse auction on behalf of its members and sign a contract that the winning supplier is willing to offer on to any buyer on the GPO platform.

With a GPO, there is the comfort of others. A B2B buyer can trust that the GPO has done the heavy lifting to discover, vet, and screen suppliers, negotiating a price that is deemed to be competitive. The buyer can execute in a fraction of the time, minimizing transactions costs. The GPO becomes a procurement channel. It is like stepping into someone else’s catalog.

For most types of indirect spend, there are good GPOs. There are even sector-specific GPOs, e.g., in healthcare. They offer ready contracts. They are a decent solution, particularly for smaller purchases than the size of acquisition that require an RFP or RFQ.

The GPO’s list of offerings constrains the buyer; they can only buy what the GPO facilitates. When it comes to indirect spend, there are an infinite number of goods and services buyers source, only a subset of which appear in the typical GPO arrangement.

For most of these things, B2B procurement staff will execute a reverse auction independently, issuing an RFP or RFQ themselves. This requires time, market intelligence, and supplier participation, each of which is costly.

What if we could set up a one-off group for a single purchase to generate competition on price and solution, to share suppliers, and to pool market intelligence gathering, while speeding up the process and lowering transactions costs? Think of this as a Joint Purchase, or even as a “synthetic” GPO without an organization formed for the purpose.

The biggest obstacle to joint purchasing of this type is finding other buyers with whom to collaborate. Right behind it in terms of difficulty is the coordination of the solicitation process across multiple buyers, each with their own varied constituencies.

A buyer who wants to purchase collaboratively with one or more others must find others who are also in the market for the same product, pool their market intelligence, and develop collectively the bid solicitation document. The solicitation itself is similar to a standard single buyer reverse auction with an RFP or RFQ; the lead buyer can perform this administrative task.

Then, the buyers must coordinate consensus building in two dimensions: across organizations, and within organizations.

When multiple buyers collaborate to issue an RFP or RFQ jointly, it converts a one-to-many process into a many-to-many process with the attendant increase in benefits, offset by higher complexity. What if we could reduce the complexity to that of a regular RFP or RFQ?

To make joint collaborative reverse auctions for indirect spend work, we would need to develop networks of buyers across industries. We would need to make it easy for them to find one another and develop trust.

These buyers would also require a mechanism for cooperating on the development of the Statement of Work. This means access to market intelligence.

Buyers would need a way to vet and onboard suppliers rapidly, as they share their existing vendor bases and attract new ones to drive an increase in responses.

Buyers should offer suppliers an accelerated sales cycle, with a larger opportunity, and the prospect of further knock-on sales from other buyers at the same terms in the future to drive supplier engagement.

Most importantly, the buyers require a way to coordinate the input of multiple internal stakeholders across the various buyer organizations, ideally weighted by the organization and by role, with a way to roll up the reviews of supplier proposals into an efficient recommendation.

That’s what we’ve built at EdgeworthBox.

We have stapled a social network to data repositories and a central clearinghouse of vendor risk management. And now we have a collaborative purchasing tool.

Buyers can speak with one another and share their own structured data (and leverage its value internally). Marry that with a tool that permits multiple stakeholders to review supplier proposals and to roll up the results with the data sliced multiple ways.

Note that this kind of tool is also a useful supplement for the GPO itself as part of its sourcing process.

EdgeworthBox is a platform that helps buyers purchase the right solution, from the right supplier, at the right price. We have a social network in the form of profile pages and messaging. Buyers can check out supplier marketing materials without triggering digital marketing alerts. Anyone on the platform can message anyone else. Buyers can obtain market intelligence from other buyers, suppliers can partner with other suppliers, and buyers and suppliers can get to know one another. We have public and private repositories of structured data related to live RFPs, historic RFPs, and historic contracts. See how others put together their Statements of Work and what they paid, across hundreds of categories. Suppliers control a “lockbox” of answers to standard due diligence questions and supporting documents that they release to buyers upon request. Our product development pipeline includes AI tools for automatic SoW generation and supplier response generation, as well as Web3 smart contracting for commoditized products and vendor, identify management. Buyers and suppliers join for free. Buyers pay a small fee to execute reverse auctions.

If there were ever a year in which procurement should be treated strategically, it is 2021. The massive Pandemic-induced supply chain disruptions showcased the lack of visibility, the concentrated vulnerability, the geographic risk exposure, the cost of weak supplier relationships, the suitability of systems for remote work, etc.

What does it mean to say that a business process is strategic? What is strategy?

A business strategy determines where a business seeks to go and how it plans to get there.

What markets will the firm target? What products will the firm sell? How will we allocate our scarce resources to make this happen in a sustainable, profitable manner? What does this mean for the way the enterprise organizes and finances its operations? How complex are our operations? Where are the risks to our success and how should we mitigate them?

Tactics on the other hand revolve around the execution of this strategy on a day-to-day basis.

How do I deliver a particular project for a specific customer? What do I have to do right now to make good on my promises to customers and other stakeholders? How do I onboard new vendors? What does my spend cube look like?

Here’s the real question: is procurement strategic or is it tactical? How do you drive internal collaboration around procurement?

The truthful answer is that it is both, but that companies have relegated it to the realm of the reactive and the quotidian.

Chief Financial Officers and pliant procurement staff have coalesced around the notion that procurement is about cost reduction. Value-for-money in this view is about the lowest price. In this characterization, procurement is entirely tactical.

Covid 19 revealed the weaknesses of this thinking.

Procurement is also strategic in that it spans questions about sustainability and macro direction.

What kind of firms do we want as suppliers? How do diversify our exposure to different vendors so that we can reduce the vulnerability of the firm to supply network disruption? Once we have decided upon a particular market to target, what inputs will we choose for our products? How will we purchase goods and services from third-parties? How do we manage supplier relationships so that we get the most benefit?

We’ve spoken before about how Boards should think about procurement.

“The lessons of the Pandemic are that strategy at the firmwide level is about managing the risk profile to maximize the upside and minimize the downside subject to resource constraints and that sourcing is an integral part of this strategic management of risk.”

We have also talked about complexity and strategy, quoting the Deloitte CPO survey of 2019:

“Complexity can be exploited to expand procurement’s influence beyond traditional sourcing-centric spend management toward a broader engagement model and service offering. This includes efforts to more broadly influence business stakeholders in strategic areas (e.g. capital expenditures, enterprise risk management), as well as to more deeply influence stakeholders through demonstrated leadership in areas such as corporate development.”

The best way to do this is to bring the key strategic decision-makers into the procurement conversation.

To do this we need a forum for the conversation. Experience tells us that it is profoundly difficult for procurement to insert itself into the “room where it happens.” Out of sight is out of mind.

Key people from across the firm need access to data and processes, delivered in an inclusive manner, to be able to want to talk about procurement.

If the VIPs aren’t going to log into the ERP module to check out procurement, then the CPO will have to bring this process to them.

This is precisely why we built EdgeworthBox.

By layering on an inexpensive platform that not only connects buyers and suppliers but also people within the purchasing firm to one another across differing functional responsibilities, CPOs can bring procurement data and processes to critically important internal players. This is the way to make procurement strategic.

This may be the only way to make procurement strategic.

We incorporate features from capital markets in a tool that augments the existing purchasing approach; there is no need to rip out the expensive plumbing. EdgeworthBox is a way to expose procurement’s function firmwide, for the general benefit. Give us a shout. We’d love to talk to you.

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When chains started to break in March and supplies tightened, suppliers allocated scarce quotas to buyers with whom they had the best relationships. Relationship management is part of risk management.

Buyers who treated their suppliers as vassals who would (and presumably should) do anything for “the business” suffered disproportionately during the Covid supply chain shock of 2020.

Relationship management is a subset of a broader problem when it comes to risk.

Procurement is an exercise in risk management that buyers in the pre-Pandemic period treated as a pure cost optimization function. Instead of managing risk and preparing for uncertainty, buyers pursued cost minimization relentlessly and ruthlessly, concentrating supplies for marginally lower unit costs, offshoring to emerging markets, etc. We’ve written about this previously.

Buyers obtained false comfort from the thought that they forced their suppliers to take all the risk, giving the buyer putatively infinite optionality in the pre-Pandemic regime.

For example, they issued RFIs with pages of detailed questions instead of paying for market research in individual vertical categories. Suppliers responded with the hope that this was a preliminary step in an acquisition process that would be a fair fight, only to discover that there was never any genuine intention to purchase.

Buyers could force suppliers to take input price risk, or supply disruption risk (force majeure, qu’est-ce que c’est?), or other sorts of risk, all while driving a hard bargain on price.

Yet, many of these same hard chargers would proselytize simultaneously for collaboration and partnership.

The Covid crisis was the harshest test of the buyer’s true commitment to collaboration.

Here’s Miguel Cassio from Gartner speaking at the Gartner Supply Chain Symposium:

“During these turbulent times of Covid-19 we’ve all been starving for that capacity of suppliers. Guess who’s been getting that capacity? Preferred customers of these suppliers. So increasing collaboration with suppliers makes sense and there are tangible benefits to be had.”

Collaboration, practically, means partnership. The buyer partners with the supplier to work together on innovating new solutions. Both sides jointly develop capabilities relevant to the problems the buyer business units seek to solve. Buyers and suppliers evolve together, symbiotically.

One thesis for the lack of collaboration is its infrequency. Structuring these meetings around quarterly performance reviews removes the focus on joint development and demotes the discussion to the quotidian from the strategic.

Here again is Cassio:

“The first one is access to leadership, it has to be constant, and cross functional. [sic]

“This means no more QPRs [quarterly performance reports] or executive meetings where your suppliers are just sending someone from sales, and you’re just sending someone from procurement. No, these meetings usually have to involve the senior leaders across different stakeholders so that you can think and speak about the different things that the relationship needs.”

For buyers to have “skin in the game” means that buyers are sharing in the risk and sharing in the innovation. And it means frequent communication with a broad variety of people from both the buyer and the supplier firms.

EdgeworthBox is a platform that sits as a layer in the procurement technology stack with collaboration as a central feature. We bring features from financial markets to help buyers get superior value-for-money and to help suppliers get a cleaner sales process with more customers. Adding our solution to the incumbent infrastructure makes procurement social with our messaging platform that connects buyers to buyers, suppliers to suppliers, and buyers to suppliers. Collaboration can be frequent, relevant, and multi-dimensional in our framework. in addition to connecting players from across the enterprise into the procurement process. Check out this short video.

If you think that way, it’s easy to give the suppliers short windows in which to respond to RFPs, or to give suppliers little information about why you’re purchasing or what your key problems are.

It’s just part of the game to make the suppliers work like dogs on a proposal and to then nickel-and-dime them when it comes to finalizing the contract. By this logic, everything is a commodity. Nobody adds value.

These immature purchasing agents rationalize this behavior by saying it is the suppliers who are the ones who want our business. Might as well make them work for it. Right?

Of course, this creates what an economist calls an adverse selection problem, at least in the limit.

Buyers who treat their suppliers as vassals will end up with vassals as suppliers.

The good ones, the vendors who want to solve your problem as partners, won’t waste their valuable time.

One of the corollary lessons of Covid is that buyers are competing for the right supplier relationships.

When channels got tight, when things got weird, suppliers favored those with whom they had strong relationships. Nobody likes being treated like an indentured servant.

The deepest lesson from the Pandemic has been that enterprise procurement isn’t (and hasn’t ever been) about cost minimization. It is risk management. Done properly, it is about creating opportunities for upside and minimizing the exposure to downside. The world is an uncertain place.

Good buyers know that they have to go out there and woo the right suppliers to engage with them, so that they can see the full gamut of solutions to their problems and generate a real sense for value.

Procurement isn’t about running an RFP process any more than hockey is about knowing how to take a slap shot. Procurement is driven by obtaining value-for-money, just as hockey is driven by putting the puck in the net.

The RFP is just a means to an end.

But somewhere along the line people forgot this. They became more interested in the process than the outcome, the bureaucracy more than the objective.

If you want to find suppliers, there’s an easy place to look.

But, if you want to engage the best suppliers, you are going to have to collaborate with them.

EdgeworthBox is a platform for strategic sourcing. We provide a layer that complements existing procurement infrastructure, so that buyers can execute an RFP cycle that leads to more supplier proposals, when an RFP is appropriate and also develop relationships with suppliers that are suited to a broader context. All without changing the infrastructure they have invested so much in building to date. Give us a shout. 

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Strategy is defined in the dictionary as “a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result.” Before the Covid-19 crisis, many thought of the world as deterministic. While there might be volatility or uncertainty in financial instruments leading to crises like the Global Financial Crisis, this was perceived to be separate from low levels of real volatility. Globalization increased monotonically, technology evolved, and the world seemed to have converged on profit-maximizing corporatism. The only shocks to the system came from contained natural disasters like tsunamis or earthquakes or floods. Even climate change was deemed to move in one direction.

In a regime in which volatility seemed limited or, at least, something the firm could hedge with the right insurance coverage, and one in which companies did not have any acknowledged responsibility to stakeholders other than their shareholders, then the target for strategy was simple: lower costs.

It is a cliché that the first place anyone seems to turn for cost savings is procurement. You see this in merger announcement press releases, in restructuring plans, , and in regular corporate presentations to investors. Companies announce that they will obtain procurement cost savings from vendor rationalization, the elimination of duplication, or even digital transformation.

In practice what did this mean for procurement?

It meant outsourcing much of a company’s supply chain so that only the final stages of value addition were performed domestically and internally. In the limit, companies would outsource research, development, and production, retaining only distribution.

It meant concentration of purchasing with a single vendor (or a small number of vendors) to obtain discounts driven by scale.

It meant offshoring to countries where the wage gap with the developed world had not yet closed.

It meant that the corporation ignored issues of social importance, like race and inequality. Milton Friedman’s dogma on social responsibility prevailed:

“… there is one and only social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

As Warren Buffett is reputed to have said, “Only when the tide goes out do you discover who’s been swimming naked.”

Companies who focused on cost-minimization exclusively or primarily were self-insuring against risks they did not perceive, confident that all of their competitors were doing the same thing.

When the Pandemic lock-downs started to bite in the Spring of 2020, it was clear that the world was not deterministic. Economic losses due to lost revenue and higher costs started to roll in with the concurrent realization of multiple risks.

By outsourcing their supply chains, companies discovered that they lacked visibility into who was providing them with what. They definitely knew who their prime contractor was. They might know from whom their prime contractor sourced his inputs. But they almost certainly did not know who these sub-contractors sourced from and so on and so forth. This was critical because the points of failure were more likely to be located deeper in their supply chains. Without the ability to identify these vulnerable third-tier (and beyond) suppliers, it was even more difficult to mitigate risk ex post facto.

In concentrating purchases with a single vendor, buyers found that they had foregone the benefits of diversification for marginally cheaper unit pricing.

Many procurement teams found that they had weak relationships with alternative suppliers. Solvent alternative suppliers began to allocate limited capacity with an explicit preference for customers who had supported them before the Pandemic. The higher pricing that the ex-ante cost minimizers were forced to pay to access capacity ex-post ate into the accumulated profits from the pre-crisis salad days. After all, those prior savings were like the insurance premiums they had avoided paying for not purchasing the hedges that would have smoothed their results in the crisis times.

The Pandemic’s effects were not restricted to health and productive capacity; they also sparked geopolitical tensions as rivalries erupted in competition for positioning and resources. For those who had sourced from countries in the developing markets, they risked having their access to products they needed desperately limited, diverted, or delayed.

The effects of the lockdown combined with a series of tragic events to provoke a re-examination of the corporate social contract. Companies had to ask themselves, what were they doing to promote diversity and inclusion?

Naturally, the principal focus here was on hiring and internal advancement. But buyers have an even greater ability to empower diverse suppliers with contracts that help these typically smaller companies develop capacity, capabilities, and relationships necessary for sustainable wealth generation. How would perceptions about corporate behavior affect brand and, ultimately, revenue?

The lessons of the Pandemic are that strategy at the firmwide level is about managing the risk profile to maximize the upside and minimize the downside subject to resource constraints and that sourcing is an integral part of this strategic management of risk.

Most companies are (or should be) preparing Board-level discussions of how to revamp their approach to supply chain risk. Expect these to be discussed and debated intensely later this year and early next year now that we are through the most reactive phase of the crisis.

The first thing they need to do is to spell out the different dimensions of sourcing risk that they face with procurement. Here are just a few that could affect the value of the firm.

• Price: Have they obtained the best price?
• Supplier Concentration: Have they diversified and limited their exposure to individual suppliers?
• Geographic Concentration: Have they diversified and limited their exposure to individual countries?
• Subcontractor: Do they have visibility into the supply chain and have they taken steps to mitigate the risk associated with subcontractor suppliers?
• Inventory: Do they maintain adequate inventories for a variety of scenarios?
• Supplier Relationships: Do they have strong relationships with the best suppliers?
• Market Intelligence: Do they have access to real-time intelligence about potential supply chain shocks in their markets and sourcing locations?
• Revenue and Brand: How does the firm’s engagement with diverse suppliers affect its revenue? Is membership in supplier and diversity organizations sufficient, or will companies need to increase their direct engagement with these suppliers materially?

These risks (and potentially other risks specific to the individual buyer firm) bear upon the kind of technology solution the procurement department requires.

One solution is unlikely to span all these dimensions comprehensively. Firms need to have a procurement technology stack, combining several solutions each of which addresses a subset of the overall risks.

To date, digitization in these tools has preserved the antecedent analog business process with its one-buyer-to-many-suppliers transactional orientation. These software solutions were more about executing a simple process. They were not built to manage risk.

In planning digitization as part of the strategic re-engineering, Boards should think about ways in which they can get the information they need, when they need it.

This doesn’t have to mean pulling out the plumbing and starting from scratch. That’s a straw-man argument in favor of the status quo that becomes less feasible every month the world is mired in this new normal.

The ideal solution is going to have features from financial markets risk management software. That’s why we built EdgeworthBox. It’s a layer that sits in the procurement technology stack to augment the existing approach. Whether you’re using email and spreadsheets or you’re using a cutting-edge cloud-based source-to-pay functionality, EdgeworthBox can help you access market intelligence and a community of other users the same way that financial market participants do using structured data and communities. And we do it all while making things simpler, fairer, and faster for suppliers so that more of them want to engage with buyers, creating more options. Check out this video. Give us a shout. We’d love to talk to you about procurement.

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Typically, hiring managers will obtain these services from one of several channels: staffing companies who supply labor on a time-and-materials basis; large IT services firms who offer consultants based upon a Statement of Work specification or on a Managed Services basis; or gig workers offering freelance labor.

Estimates of the market for Statement of Work/Managed Services (“SOW”) contracts suggest an annual rate of $250 billion, roughly equivalent to the size of the staffing market. On the buyside, local managers (not centralized HR or procurement) typically manage these engagements from selection through final delivery.

The trend is ever higher. Mercer writes “… 79% of executives expect that contingent and freelance workers will substantially replace full-time employees in the coming years.”

Imagine a manager working in the IT department of a large company. She is responsible for supporting the operations of an individual division, including maintenance of existing systems as well as the extension of new capabilities, subject to established budgets and project descriptions. She can either use her own team to deliver results, or she can bring in outside help, on a temporary basis. For example, part of her broader mandate may be to make system A talk to system B. She brings in extended workforce talent to handle this discrete project.

One key risk here is compliance. She needs to take adequate steps to ensure that the government will not re-characterize the extended workforce as employees. Co-employment is difficult. A key risk is the risk of misclassification in which the individual worker or the government argues that the individual was, effectively, an employee. This could lead to back payment of benefits, higher wages, and higher taxes. Governments have been getting more aggressive about prosecuting this. Tech companies such as Uber are juicy targets, for example.

Many consulting firms have argued that mitigation of misclassification risk requires either a Statement of Work or Managed Services approach, both of which they (conveniently) use as a contracting methodology. This may not be as true as the consultants would have managers believe because “… the burden of proof (and most of the risk) is on the buyer of the services. Absent any proof to the contrary, the beneficiary of the work product is generally considered to be the employer.”

A bigger risk with more personal import for CIOs and their staff is the risk of getting fired.

As Smart Ledger writes:

“We all know that the unit costs of technology is falling year-on-year, the problem is that the demand is increasing even faster. This means left unchecked, the costs of IT would explode year-on-year – and if this happens every CIO knows that they will be out the door before the kickoff budget planning round has even finished.”

McKinsey writes that “Using a global network of experts and proprietary benchmarking tools, we found that companies were paying 30-50 percent more than they should for their contracted services.” This may be due, in part, to the weakness of management. Over 90% of respondents to a Deloitte survey acknowledged room for improvement, with more than half citing inconsistent or non-existent processes for managing extended workforces.

Another key vulnerability is scope creep: “continually adding requirements as a project progresses. If the scope grows too large, it can even cause the project to fail.”

One way to address the possibility of scope creep is to discover and specify the requirements of the project in great detail upfront. Once the project manager has done this, they can write a contract for the project laying out key dimensions:

1. What will the project deliver?
2. Who is responsible for each of the deliverables?
3. What are the milestones and checkpoints that the team needs to meet along the way?
4. How will the team determine how to change the project?
5. How will the team allocate the costs and responsibilities of changes to the project?

The contract can be either with internal stakeholders as in a guarantee from the internal project manager to execute a particular plan. Or it can be a contract with third parties, either staffing firms or consulting firms.

In any project, there are multiple stakeholders.

Business users want to get the maximum functionality possible from the new solution and they may be indifferent to questions of expense if the cost center does not affect them directly. They will push for change in the form of additions even after the finalization of the internal contract.

The hiring manager aims to get the project executed on time and on or under budget while meeting all of the performance targets and minimizing management distraction.

The consulting firm is looking to execute the project with the maximum profitability possible. If it is a fixed cost project, they hope to allocate the smallest set of feasible resources. In either the case of fixed cost or time-and-materials billing, there is an incentive for them from increased scope. Often, the unit costs of additional requirements can be higher than those in the initial contract, ostensibly to compensate the consultant for the additional flexibility they must provide. It can also mean extending the timeline for the project, keeping the consultant’s resources fully occupied for longer, improving utilization rates.

Here is a good summary of the consultant’s perspective from the Liquid Planner site:

“Scope creep can actually have an upside for projects with external clients. With a properly written contract, added features can produce new revenue. When the request is made, you calculate the additional hours of work and allow the client to sign off on the requested work. Your scope creep then becomes the customer’s cost creep.” (emphasis added)

Having laid out the context, what is the key challenge for procurement of extended workforce services?

Recall, however, that local managers usually act without the involvement of HR or procurement when it comes to sourcing extended workforce services.

Ideally, the hiring manager will collect the requirements for the project and write a Statement of Work describing what needs to be done, independently, using this document to solicit bids in competition from a number of potential service providers.

In practice, hiring managers may not behave independently. They collaborate with one supplier, picked from a short-list of approved vendors, to develop the Statement of Work. In some cases, the consultant is the one who writes this project contract. The manager then awards the work to the collaborating supplier on an effectively sole-source basis.

Not only does having the supplier influence or write the Statement of Work in the absence of competition increase the risk of misclassification, the conflicts of interest between the buyer and the supplier here can lead to scope creep and intellectual property leakage, by design.

If the Statement of Work purposely (or sloppily) excludes anticipated requirements, then scope creep is more likely, along with the attendant cost inflation.

Often, there is intellectual property associated with the work that the third-party contracts to execute. This may be in the form of written code or other engineering solutions. A well-written contract should ensure that the buyer has perpetual, unrestricted access to this intellectual property. Otherwise, the consultant can hold the buyer up for expensive subsequent work that relies on this IP.

Existing tools such as the VMS/MSP approach don’t do enough to encourage competition and manage this process. Indeed, hiring managers in the IT department or other line departments may find the Statement of Work solicitation intimidating to the point that they welcome the intervention of a favored consultant.

Of course, one could also argue that this lack of competition and the undue influence of the supplier over the assembly of the Statement of Work is an example of procurement fraud.

The more this behavior takes place, the more likely it is that tension between the IT department and procurement increases. IT wants to control the technology aspect of the project to get better outcomes. Procurement wants to control risk and price.

It’s possible to make them both happy.

Accessible sourcing platforms like EdgeworthBox make it easy for IT hiring managers to execute a simple RFP, soliciting competition from multiple consultants and staffing firms, even as they first use the structured database and social network to collect the information they need to develop independent Statements of Work. For the most common contracts, it would even be possible to have templates that multiple buyers used, massively lowering the intimidation factor that leads to such distorted outcomes currently. Give us a shout. We’d love to talk to you.

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What are people afraid of? What’s the worst thing that could happen?

Do buyers really think that their competitors cannot figure out what goes into their products? Do buyers really think that they have some sort of competitive advantage that relies on the secrecy of their sourcing?

If they do, then they’re wrong.

In technology, for example, competitors routinely reverse-engineer each other’s products to get a good idea for what the bill-of-materials looks like. Analysts and competitors strip down Apple’s latest products the moment they hit the market.

On the other hand, governments have mandated transparency. For example, you can search easily on EdgeworthBox across agencies like the Department of National Defence for links to detailed pages on the Government of Canada website. You will find prices paid, vendor information, information about the procurement officer, etc. Check out this project, a requirement to purchase fifty-four “Light Multipurpose Utility Vehicles.”

Publishing this information forces the purchasing department to conduct a well-run process.

Louis Brandeis got it right when he wrote:

“Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

The benefit from all this supplier secrecy is negligible and secrecy may obscure sub-optimal procurement patterns. What else do buyers sacrifice in conflating confidentiality with competitiveness?

By not publishing data on what your firm is purchasing, are you failing to advertise your interest to suppliers who might be able to solve your problems? Are you making it more difficult to attract replies to your RFPs?

Could companies benefit from collaborating with their competitors on learning about markets for the inputs they each require? Could buyers and suppliers have a more productive conversation about the direction of future product development and the establishment of product standards (that lead to lower unit costs, faster)?

The COVID-19 crisis may have an ancillary benefit in promoting cooperation between competitors. Here is the Chief Procurement Officer for AMD speaking about collaboration between rivals, “Companies are now able to learn from one another in real time through collaboration. It’s changing the nature of how companies view competitiveness.”

Competitive advantage is determined by the value your firm offers its clients.

For commoditized goods and services in which pricing is the determining factor as to which firm wins and which firm loses a deal, then maybe the bill-of-materials is a key factor in driving value.

For everyone else, where value is determined by how a company uniquely enables its customers to do things more efficiently or to bring new products to market or to consume in novel or must-have ways, then rivals focus on factors other than sourcing in trying to out-compete.

Does Apple really care that the world knows they can sell a phone for $1,000 that costs them $370 to make?

Apple focuses on delighting their customers, investing the coolness of the brand, developing the network effects of their app ecosystem, and innovating on new products and experiences.

Of course, having a transparent process (even though that publicity is imposed upon them by the market) helps to keep their procurement department accountable. Perhaps that explains why they are so successful at sourcing.

Apple also works with its competitors. So-called “Frenemies”, Apple and Samsung, compete hard in phones, even as Samsung is a key supplier of components to Apple.

EdgeworthBox is a platform combining a marketplace matching buyers-and-suppliers with tools from financial markets including centralized clearing of vendor administration and data, and social networking for collaboration among buyers and suppliers. It complements existing software from established vendors in a way that helps buyers and suppliers update the RFP process for the 21st century, wrapped in an app-like user experience. The tools alone are interesting, so come for the tools and stay for the marketplace.

We’d love to talk to you about a free trial. You can check us out with this video. Or drop us a line.

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