The article below is written by Joris Krol on August 7, 2012
The current economic crisis puts pressure on governments to cut spending and reduce deficits. With public procurement often accounting for 10-15 percent of a country’s GDP and for up to 65 percent of public sector budgets, governments are faced with the challenge to keep adding maximum value while at the same time rigorously reduce their spend.
This implies that many government organizations need to shift from a budget driven to a value driven way of thinking and acting, but this also means that there is an important role for the procurement function to fulfill.
The public procurement function, however, is faced with a number of challenges:
- The fear for negative publicity has led to a growing emphasis on the legal aspects of the tendering process.
- Procurement acts in a reactive way and is often not involved until the specifications have been defined.
- Procurement is seen as an operational department and not perceived as an advisor or partner of the Business.
- Procurement is organized around contracts rather than commodities. There are peak moments when contracts are about to expire, but there is no continuous process to manage internal and supply market developments and opportunities.
- Procurement does not feel it is responsible for the operational procurement processes, there is no focus on managing the end-to-end process and closing the procurement loop.
This raises the question how Procurement can overcome these challenges and step up to the plate.
Introduce multidisciplinary commodity teams
There should be a clear category and commodity structure that is in line with how the Business and the supply market is organized. Stakeholders are identified on a commodity level and multidisciplinary teams, with representatives from both the Business and Procurement, are set up and meet on a regular basis. During the commodity meetings internal and external developments are discussed and areas of improvement are identified. This way of working ensures that Procurement is in touch with its stakeholders, that the commodity is managed as a continuous process, and that Procurement is involved at an early stage of the tendering process.
Develop commodity profiles and strategies
Commodity profiles are created by Procurement for each commodity. These profiles give a clear picture of the current situation and cover among other things: market trends and developments, internal policies and developments, stakeholder demand and wishes, processes, spend, contracts and compliancy. The profiles are a strong tool to proactively share insights with the stakeholders and form the basis for the development of commodity strategies, which is done together with the multidisciplinary team. Many procurement professionals have a tendency to focus their strategies on the current supply market (i.e. price reductions), but commodity strategies can just as well focus on optimizing the demand side (i.e. reduce consumption or improve the specifications) or on reducing the integral costs (i.e. optimizing the purchase to pay process).
Implement Closed Loop Procurement
Procurement has implemented Closed Loop Procurement and takes ownership for the end-to-end procurement processes: from the tendering process to contract implementation and management to the purchase to pay process. Only by focusing on the entire process can it be ensured that contracts are implemented and used as intended, lessons learned are incorporated in the next tender and supply will continue to match demand.
Develop methods and skills
For many public procurement organizations this means a new way of working that asks for new methods & skills. For example, the methods & skills related to: market analysis, stakeholder analysis, total cost of ownership analysis, commodity strategy development and business case development, should be taken into account. But, also the advisory and project management tools & skills needed to translate insights and ideas into successful projects should be addressed.
Facilitate behavioral change
Perhaps, the biggest challenge when implementing this new way of working is that in most cases a behavioral change is needed. If procurement professionals want to act as internal advisors they have to take ownership, be proactive and constantly ask questions and look for improvement opportunities.