August 08, 2019

Wade, Tread Water, or Swim; But, Please Don't Walk on Water Too Much

Laurence Chalem

Laurence Chalem
Procurement Executive/Cost Savings Consultants

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Looking back on twenty years in procurement—and forward to a few more—I feel honored to pass along some insight to those new and not so new to the profession, whether in a procurement role somewhere in the hierarchy, or one of the myriad stakeholders from within the flattening hierarchy of the different, and oftentimes conflicting corporate functional groups and departments. Or maybe you’re a supplier about to learn either what’s in store or a more or less accurate summary of what happened.

And that’s the beginning of insight into the profession, that there are a finite but vast number of direct and indirect stakeholders of the procurement function—depending on organization size, industry, and commodity profile to be purchased—each an individual with their own unique ambitions, attention spans, beliefs, biases, business sense, communication styles, circumstances, demands, expectations, experiences, fears, formal education, humility, integrity, interests, knowledge, maturity, methodologies, needs, negotiation experiences, outlook, perceptions, personality, political views, preferences, pressures, skills, standards, temperaments, tools, wants, and willingness to assume risk. There are those stakeholders or internal customers who will work to get you dismissed after your first meeting if you cannot demonstrate that you will be working solely in their best interests. Conversely, a few start the relationship as, and others become your champion. Some will view you as an obstacle before you even meet them. Others won’t give you the time of day it seems no matter what you do, likely thinking that positive reinforcement shows weakness or unmet needs are motivating. Some may even be openly hostile to you, maybe thinking that’s an effective form of negotiation, may advance their career if they belittle someone else, or may simply be a form of nervous aggression. I normally respond with empathy: “Oh, I can see how you would feel that way.”

Because performance expectations are continually increasing and budgets incrementally decreasing, many P&L-owners see procurement in general as bringing value in the form of increased capacity—budget—even if they haven’t yet met the procurement representative assigned to them personally. Even so, many will find you a necessary evil, to a greater or lesser extent, thrust upon them from on-high from which they need to go through to get what they want, in what must seem like a longer amount of time than when they would prefer to receive it; you know, like yesterday. I have multiple degrees including an MBA, decades of experience with hundreds of millions of dollars in documented cost savings under my belt, have written three books, volunteer my free time, talents, and energy to make the world a better place—I golf too—and still meet people who assume I’m a lump of clay. That said, if you seek to build trust, and become trustworthy, some may eventually seek you out for your trusted advice and value-added services. But it must be earned every day.

Procurement—inculcating external suppliers into internal operations utilizing spend analyses, strategic sourcing, contract management, and supplier management processes—from most stakeholder perspectives is concerned with best serving the company by getting the right things, at the right time, in the right quantity, at the right quality, at the lowest price, under the best terms possible. “Swimming,” in my parlance. Don't get me wrong, being able to swim is important; people need the things they need when they need them because they, in turn, are incorporating that product or service into a derivative product or service for their customers, internal or external, or for their own consumption. Time can be of the essence.

Fulfillment dates notwithstanding, delivering even flawlessly on the aforementioned expectation seems to oftentimes fall short of some stakeholders’ optimal solution. Monday morning quarterbacking seems to find room for improvement, again and again, not least of all money left on the table, buyer’s remorse notwithstanding. Individual accomplishment comes into play too; time and again procurement can be heard lamenting, “I could have done better.” How does a person in this field stand out? How can we be viewed as walking on water; more, have our personal procurement services or entire department be viewed as achieving competitive advantage? Can it be through delivering significant, best-in-class cost savings?

In answering those questions, my vision of procurement was influenced and eventually shaped by Karl Popper’s book Conjectures and Refutations: the Growth of Scientific Knowledge (1963). Karl Popper introduced and intended to use the concept of falsificationas the demarcation between science and pseudoscience, so he related it more to the philosophy of science; but, I have applied the concept to business problems.

The idea is simple. We work to develop bold procurement-related hypotheses to test with the hopes of falsifying those hypotheses, allowing us to garner price decreases, quality increases, better terms, or service efficiencies as a result. For example, let’s say we were working on a project and we need to have specific language concerning a renewal clause, say, we needed an automatic renewal clause to assure future supply, limiting time spent in future years negotiating, perhaps with no or at least minimal price increases. If we’re working with potential vendors smaller in size than us, we may think it a relatively easy negotiation. But if we’re working with vendors that outclass us in one or more parameters, we may have a different outlook. Some of the team may be more pessimistic and just forgo even trying, suggesting we should just acquiesce to any of the awarded vendors’ terms. I’d propose building a hypothesis and severely testing that hypothesis in such a way that we can clearly see said hypothesis is true or false. Stated in the positive, the null hypothesis could be: “We could obtain an exception to such and such vendor’s escalation clause,” and could be severely tested through some sort of event—a demand, a competitive RFP, et al., and either find the hypothesis to be tentatively true or false. Ideally, we would be able to falsify the hypothesis and develop an automatic renewal clause language that best serves the organization’s interests. Now that’s walking on water.

Procurement hypothesis testing in a business setting necessitates assuming some risk, as vendor responses and eventual outcomes—while there may be likely scenarios, conjectures—are mostly unknown. Besides the targeted outcome of supplier acquiescence, risk in many cases comes in the form of negative outcomes such as less beneficial terms, higher prices, contract terminations, etc. Experience is the driver of developing procurement strategy and setting up the “tests” on most projects; the value comes from having done similar things over time and applying those experiences to make a judgment call in a limited information environment. There is much value to those individual experiences; but—and this is key—each procurement test is unique and, stated again, the outcome is unknown. Analyzing the data from a severe test is the only way to know the truth, i.e., did we get to where we wanted to get, did we do even better, or did the project go south.

The beauty of utilizing this paradigm is that it shifts the focus of attention eventually from personnel to the marketplace. True, people can debate whether the right test was performed, or whether or not it was performed correctly, but if the resulting data from, say, a real-time, reverse auction, testing the hypothesis that a company can reduce the cost of power distribution units, shows that pricing cannot be garnered any lower than that currently contracted, then it is the marketplace, at that particular time, telling that particular company, that their hypothesis is false. We tested the hypothesis—severely so—and falsified the hypothesis. Time to move on.

Note that if we don’t falsify any particular null hypothesis, we have not found the bottom; rather, we have located a new precipice. The next decision would be to generate further hypotheses, leading to the inevitable question, “When are we done hypothesizing?” The answer to that question is simple: “When you have falsified the hypothesis.”

It has been stated that procurement is an art form; if so, it is like sculpture. With each amount of material removed, no matter how much or little, we come closer to the finished product. In our procurement case, that final product is the proverbial bottom, the point at which the supplier will give no more. Imagine the brief conversation with a budget stakeholder once they’ve been notified of the outcome of negotiations you performed on their behalf:

As stated, Karl Popper introduced and intended to use the concept of falsification as the demarcation between science and pseudoscience. Scientists test bold hypotheses with the aim of falsification. Actually, that needs a little explanation. They do not intend for the experiment to fail; there is no interest in the outcome. What they do want, however, is to set up an experiment whose outcome has the potential to fail; they want it to be falsifiable. For example, if I were to test the hypothesis that all objects fall to the ground in the same amount of time regardless of their weight, I would be able to falsify the hypothesis if, when I throw a feather and a bowling bowl off a ledge in a vacuum, the feather somehow manages to fall at a slower rate. That test meets the requirements of a falsifiable hypothesis. Now, the question is whether or not in running the test, was the hypothesis itself falsified? If after running the test it is found that the particular hypothesis cannot be falsified, i.e., both the bowling ball and feather arrive on the ground at the same time, the hypothesis is thought to be tentatively true. If, on the other hand, after running a test the data show that particular hypothesis can be falsified, the hypothesis itself is discarded. Pseudo-scientists don’t do these things. And that—falsification—is what separates science from pseudoscience according to Popper.

Once an adherent to the paradigm, once you become a falsificationist, it becomes almost second nature to demarcate other procurement professionals and even stakeholders into two camps: the contemplative strategist and the diligent tactician, the falsificationist and the conventionalist.

When folks outside procurement departments typically think about negotiation, they think it’s all about force. Still, others think it’s about the simple exchange: find a product you like, ask for the price, ask for a lower price, have the price approved, buy the product. But asking vendors to reduce their pricing—the term used to denote this behavior is “begging”—or making outright- or veiled-threats in order to achieve a price concession, in general, unless credible, are not effective, and not normally necessary either. What are the possible threats, after all? Withholding payment, canceling a contract, moving to a competitor? If you’re thinking about threatening any of those kinds of things, don't. You’d be better off to "just do it." Vendors will likely interpret such a threat in the opposite way than intended; meaning, that you need their service and there’s nothing you can do about it, at least in the immediate future. Besides, only the government can enforce a contract with force.

Business is predicated upon an agreement by honorable people to exchange value voluntarily, existing power asymmetries realized through a Porter's "Five Forces Model" analysis notwithstanding. When disputes arise, as they will eventually, take the high road. Be transparent when you can, find the facts as best you can, and work in good faith toward resolution. If talks go south, just walk away. If your opponent cannot help create an environment of good faith, they will likely lose if and when it gets to court. If they make threats at you after you’ve discovered the facts on your side, then you now know what it feels like to be on the other side of the table that is providing emotion, and know that they have no argument, no ground to stand on. All they have left are empty threats and emotion. Admittedly, it feels good to have such knowledge. When I first learned that, I gained insight and appreciation into the behavior of people who try to provoke a response and, while I find no use for it, can see why they do it.

So too is responding with any of the emotions such as anger, frustration, happiness, sadness, etc., ineffectual. Why? Because emotion gives away the most vital of information: need. While I don’t necessarily completely buy into the idea that the party that needs the item being negotiated more loses, I don’t completely not agree. There are, after all, mitigating factors and solutions to dealing with this asymmetry. Nonetheless, one role of procurement is to provide messaging to external parties as effectively and efficiently as possible, enabling the opportunity to obtain needed commodities at the best terms. Emotions will normally work against you, which is why I prefer to position myself as empathetic, transparent when possible, purposeful, but stoic. We can be happy-go-lucky internally, but procurement is normally entrusted with sensitive data and critical items to buy, and we must be responsible stewards.

If a vendor does something antithetical to my interests, I may empathize or I may do nothing. If they provoke an emotional response, they would have extracted needed and valuable information, which is their job—and my job to guard against—and they win. Sure, by all means, try to live the delightful Win/Win strategies penned by none other than the late Stephen Covey in The Seven Habits of highly Effective People (1989), but where corporate rubber meets the road—where those entrusted with obtaining supply under their company’s terms and conditions meet those tasked with creating demand under their company's terms and conditions—almost anything and everything goes. It truly can be a solitary, poor, nasty, brutish, short, and highly contentious world. Going after Win/Win, where one party cares equally for both party’s interests, becomes interpreted as a willingness to easily grant concessions. To a particularly savvy negotiation “partner,” all that strategy is likely to achieve is creating an opponent who continually asks for more.

The key Procurement levers–leverage–such as having alternatives, building competition, tailoring and limiting external communications to effective messaging that reinforces strategy, and not disclosing a deadline or absolute timeline—I use relative dates to depict time to complete a task or project; you know, days, weeks, months—support effective and efficient negotiations. Deadlines are inimical to cost savings. So many people who think they are expert negotiators miss that key point made up of those six little words that it bears repeating. Deadlines are inimical to cost savings. And salespeople worth their salt are keen to uncover them. Once they do, they have little incentive to provide any price concessions; in fact, they oftentimes charge premiums, because they may be able to get away with it, empowered by those aforementioned expert negotiators. It is possible to manage your way out of such SNAFUs, especially if supported by the other key leverage, but the pathway may be a little uphill. The good news for team members that disclosed deadlines or successfully influenced the larger team, if there was one, to disclose deadlines in meticulously crafted timelines based on actual dates and not relative dates provided to vendors, is that they are able to learn the negotiation deadline lesson, and perhaps have it in their toolbox for next time.

While I might support severely testing a null hypothesis to know where the truth lies, folks in other concentric circles of concern might not be so inclined. So as much as I’d like to be perceived as delivering a great value in these cases, walking on water is simply not required by most business units. There may be times when enterprise-level projects demand this mind-set, but it’s typically the exception, not the rule.

In fact, the people who like me most are the ones for which I do the least work. They just want me to approve their requisition, sign the purchase order, and provide them the soft-copy, signed PO. Voila, a very happy customer who proudly emails my boss with the news that Laurence exceeded their expectations. No walking on water there. Just sign a PO. If there ever was such a thing as wading in business—not even needing to tread water—it’s signing a PO. Don’t get me wrong, I view this service as an integral function of procurement; but, it’s become so automated, so touchless, over the years that I feel guilty for taking credit for it. Alas, if it fulfills business demand, I’m happy to oblige.

While it’s true that we work for our customers, we ultimately work for our direct boss; you know, that woman or man that controls your entire future in the palm of their hand. We want to especially build trust with them. We want to align with their interests, for it is only they that can balance the interests of conflicting stakeholders. Conflicting stakeholders? Yes, the people who need the products or services on such-and-such date, the people from the parent company, subsidiary, or sister company, department, or group that may want an alternative solution or alternative supplier to provide that solution, supportive department(s) that would be tasked to integrate the solution into the company's platform, the Legal Department that needs to have what they need to have, senior leadership, and you the procurement representative that wants to get the best possible deal. Don’t provide accurate project status updates to your boss, don’t align with their interests, have them learn about risks or problems from the grapevine, and, at a minimum, don’t expect them to defend you behind your back, where it matters most. In today’s corporate environment, don’t necessarily expect them to defend you in person either; but, if you focus on building trust, it will go a long way to earning it, respect, and your continued survival, perhaps even your opportunity to thrive.

In short, some customers would prefer less emphasis on cost-cutting to effect increasing savings and more emphasis on collaboration, communication, and engaging with internal and external stakeholders to better influence more spend. That is entirely doable; procurement’s interests, as well as the many of the P&L-owners, can be realized when the emphasis on collaboration is coupled with early engagement of procurement personnel, potentially mooting apprehension-evoking deadlines.

These are the skills, tools, knowledge, and paradigms I’ve learned in my experience providing effective and efficient situational leadership—to other peoples’ situations—on the journey to achieve continued order from waves of chaos, the fundamental duality of organizational life.

References

For a particularly good discussion about generating trust replete with a how-to-build-trust formula, see Maister, David H., Green, Charles H., and Galford, Robert M. The Trusted Advisor. New York: Touchstone, 2000. This must-read book was introduced to me during my Cisco years.

Popper, Karl. Conjectures and Refutations: the Growth of Scientific Knowledge.London: Routledge & Kegan Paul, 1963.

The falsifiable bowling ball/feather test of the gravity hypothesis is wonderfully presented in this five-minute Youtube video.

First described by Michael Porter in his classic 1979 Harvard Business Review article, Porter’s insights started a revolution in the strategy field and continue to shape business practice and academic thinking today.

Covey, Stephen R. The Seven Habits of highly Effective People. New York: Simon & Schuster, 1989.

For a particularly good discussion of chaos and order, see especially the chapter entitled, “Rule 2,” in Peterson, Jordan. 12 Rules For Life. Toronto: Random House Canada, 2018.

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