In this context, buyers and suppliers have an adversarial relationship. We call it a zero-sum game in which the gains of one party come at the expense of the other party. Buyers may be able to squeeze a price at which the supplier breaks even. Or suppliers can charge an artificially high price because nobody else bids.

Today, with the Request for Proposal (or Quotation or Information), many buyers continue to purchase goods and services this way.

We call it a reverse auction because there is one buyer and many suppliers. (In an auction, there is one supplier and many buyers.)  Suppliers compete by offering to sell at a lower price.

Buyers select a supplier. Then, they negotiate a contract. Often these contracts have covenants on performance (“supplier shall”). Buyers see this as a contest over a limited amount of value. They believe it’s their job to obtain as much of that value for themselves as possible.

If the buyer is stringent enough, the contract becomes an exercise in compliance.

The procurement function is focused on the transaction. CFOs want to see cost savings. It makes sense. For a company with a 10% EBIT margin, $1 in cost savings is the equivalent of $10 in incremental revenue, ceteris paribus. But relationships are complex these days. Companies don’t purchase commodities; they buy differentiated goods and services. They don’t buy on a discrete basis; they purchase on a continuous, long-lived basis. Failure to buy the right solution from the right vendor can have persistent cascading consequences across the enterprise.

In the language of game theory, a transactional approach to acquisition is to play a one-period game when the company as a whole is playing an infinite-period game.

In the language of the CFO, the purpose of procurement shouldn’t be to obtain cost savings for their own sake; it should be to increase margin dollars.

The way to increase margin dollars is to raise the percentage margin by being more efficient, to lift revenue by bringing a better solution to market, or to do both. Intuitively, we know that we could get massive cost savings by purchasing inputs of low quality and poor product-solution fit, but the hit to revenue could be devastating.

If revenue drops because our customers think we sell a cut-rate product, then other fixed costs need to be amortized over a lower base. In turn, this means a lower percentage margin. A lower percentage margin on lower revenue translates to significantly lower margin dollars.

To focus on cost savings is tactical. To deliver margin dollars is strategic.

But the story isn’t over. It’s just beginning.

Three waves of disruption are hitting procurement successively.

Technology is evolving quickly. The pressure for “digital transformation” is immense. The end game for this piece is transactional efficiency. Many of these solutions answer the question: how can we execute our traditional process with less friction?

Globalization is under the gun as geopolitics rears its ugly head. Will we near-shore production and/or distribution? How reliable is our sourcing? Pressure on trade requires a new set of assumptions.

The final, most unpredictable force is the Covid crisis. What permanent impact will Covid have on the way we do business? How can we work remotely? How do we make the enterprise more resilient?

These three forces have brought into relief the fact that the enterprise today is not the company of the Industrial Revolution. We don’t buy commodities. We develop complex, long-lived relationships with counterparties, not in a chain, but in a network.

Covid has forced thoughtful CFOs and COOs to rethink the nature and importance of their relationships.

Make no mistake. These are relationships. They are alliances based on mutual benefit. If one side does well, then the other side does well. A relationship isn’t a zero-sum game; it’s a positive sum game in which one side does not win at the other’s expense.

People in a relationship collaborate to obtain a better joint outcome. 

In our highly competitive world, this comes down to partnering on innovation. Getting to market faster. Getting to market with the better solution for the ultimate customers’ problems.

If digital transformation is about executing the traditional process more efficiently, then relationship-driven procurement is about developing a new way of buying goods and services.

The relationship is the objective. Get the relationship right and everything else follows.

One day (and for some leading companies that day is already here), we will do things differently.

In this version, procurement isn’t about one-off costs. It’s not even about the total cost of ownership. These are 20th century concepts.

In the 21st century, value derives from the total benefit of the relationship. A relationship doesn’t focus on complying with restrictive contractual covenants. It is built on trust, instead. With trust, the two (or more) sides can create the conditions for rapid, relevant innovation. By the way, with trust, costs can fall, too.

As Stephen M.R. Covey writes in “The Speed of Trust”:

“Trust always affects two outcomes – speed and cost. When trust goes down, speed will also go down and costs will go up.” 

And:

“Compliance regulations have become a prosthesis for the lack of trust – and a slow-moving and costly prosthesis at that.”

In this post-Pandemic period in which “supply chain” has become a piece of jargon in the lexicon of those who know, Stephen Leider of the University of Michigan is correct when he states:

“A successful firm depends on the capacity, reliability, and the trustworthiness of its supply-chain partners.”

How many suppliers turned out to be capacity constrained during the lockdown? At some point, every company suffered from these restrictions. Yet, when tight capacity goes “on allocation,” it is the customers seen as partners who receive priority in the queue. Partners invest in capacity and capabilities to help the greater good.

Wouldn’t you, as a buyer, prefer to have a supplier who did that for you on faith, even before you committed? What kind of a signal do they send when they do so?

Leider talks of what he calls the “collaborative cycle.”

1. Supplier invests in capacity and capabilities, including technology.
2. Buyer rewards them with a higher price (sharing the benefit of the higher margin revenue the supplier’s investment is necessary in generating).
3. Supplier delivers a high quality good or service to ensure margin/revenue maximization for the buyer’s ultimate sale to its customers.

How do you build trust? What does it look like?

In “A New Approach to Contracts” from the Harvard Business Review, the authors give some good suggestions:

• Have an agreement that governs the terms of the relationship, setting expectations and mechanisms for periodic evaluations and adjustments
• Focus on areas of overlap including goals, principles, and interests.
• Instead of trying to develop covenants around potential conditions, develop a partnership framework for how the parties will work together to overcome obstacles and exploit opportunities
• Figure out ways in which both sides can maintain alignment

A successful relationship is one in which each side accelerates the profitable growth of the other side. — EdgeworthBox is a platform for procurement. 

EdgeworthBox’s digital transformation offers both transaction efficiency improvements and strategic relationship-driven sourcing. We bring tools from capital markets to improve the current approach to acquisition.

Suppliers can onboard easily, meaning that buyers can solicit a broader array of potential vendors than if they just solicit those with whom they have antecedent relationships.

Buyers and suppliers can access market intelligence more easily with our “market tape.”

Finally, buyers and suppliers can communicate, frequently and across multiple functions, developing the foundations for trust, with our social network. Whether you’re a procurement professional or a sale leader, we are looking for feedback on how to improve the process.

Contact us to learn more about how to optimize your outcomes, or share your insights.

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There are (at least) three dimensions to the problem.

One, we want to find the right match. It is a difficult search problem on both sides. What characteristics does the right person have? Should we try to figure this out in advance, or should we keep an open mind so that we can be surprised pleasantly?

Two, it can be an expensive, time-consuming process. The single person may need to kiss a decent amount of frogs before they can find the right match. That means a lot of awkward first date conversations over coffees and meals. People can spend more time matching and not enough time connecting, as they say.

Three, it can be risky. By definition, you’re considering all kinds of people you’ve never met before. How can you ensure you’re not going out with someone who is going to steal your identity or attack you physically?

Naturally, there are tradeoffs involved. If we’re willing to take on more risk, we can widen the aperture of our search to consider a broader array of candidates, but potentially lengthening the timeline and adding to the expense of filtering people.

Or we can try to engage in so-called speed dating, hoping to see enough of the relevant features in a short period of time. Of course, we risk moving so quickly that we end up overlooking potentially wonderful fits, but at least our transactions costs are lower.

Dating apps come in all manner of forms to try to help us address these issues.

The right apps allow us to open or tighten our search on some common factors such as education level, location, income, physical appearance, etc., ideally focusing our search so that the investment in further relationship building is more likely to be productive. But they can just as easily expose us to risk in the form of harassment or worse.

There is a tremendous breadth of dating apps. Some permit the woman to make the first move. They exist on a spectrum of a targeted relationships from casual to serious. Increasingly, these apps appear to focus on demographic categories. They all seem to have some algorithm for improving the likelihood of a match.

Dating apps are focused on developing three things:

• Fit: Is this the right person for us?
• Trust: Can we trust this process?
• Efficiency: Can we find our match with the least amount of effort?

They must minimize risk and bias. Here, risk means the risk that the person we meet might waste our time (or, in the worst case, do us some physical harm). Bias refers to algorithms that may be predisposed to favor certain factors and discount others, including potentially race or education or social status.

Procurement poses a similar problem: efficiently matching buyers with the right suppliers for the best combination of value and risk.

Before the pandemic, the conventional wisdoms defined the right match in terms of cost minimization.

This is not necessarily the case after the supply chain disruption experienced during the lockdown. We have other issues to consider in thinking about what makes value for money — including supplier risk, supplier relationships, and diversity and inclusion.

Some people suggest that the best way to understand risk is to have full visibility into the supplier network: to know who supplies your suppliers and who supplies those vendors, ad infinitum. This may or may not be feasible, especially in the case of complicated supply networks such as those in construction services.

An ideal sourcing system would permit buyers to cast the widest possible net in order to see the broadest array of potential solutions and suppliers. 

It would help buyers and suppliers access reliable, contemporary market intelligence rapidly and inexpensively. It would have a way to verify information about vendor performance. And it would permit relationships and collaboration, perhaps the best way to manage risk. Know your customer becomes know your supplier.

This is what we have built at EdgeworthBox. Our cloud-based web application sits as a layer in the procurement technology stack. We improve the existing approach to sourcing with tools from capital markets. 

Buyers can solicit suppliers, regardless of their existing relationship, given the ease with which they can onboard them using our tools. Buyers and suppliers can access market intelligence quickly and inexpensively. 

And everyone in the ecosystem has the opportunity to collaborate and build relationships using familiar social networking tools. Come give us a shout.

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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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