Breaking the Mold: How Flexible Procurement Practices Drive Innovation and Agility

“But the vendor has little to no proven expertise in AsiaPac or the right resources to address your requirements?” I said.

“Apparently, they’re importing SMEs from a different region and we’re hiring some skill sets in-house as well to de-risk implementation. We’ve found one key resource in Eastern Europe and I’m working with HR to understand if he’s willing to move to Sydney.” He responded.

“Or you could sign up a different vendor who has the expertise and avoid hiring legacy tech skills you will have little use for in 12 months?” I volleyed.

“We can’t. If they are not one of the four shortlisted suppliers for our strategic projects, we can’t use them for a couple of years. It will be a while before we can widen the panel,” he replied.

This was spring many years ago, and I was developing a slight migraine while having this chat over coffee with the program lead in a large organisation. It was hard to tell if it was from my hay fever or the circular conversation I was having on the topic of structured (read rigid) procurement practices. Fast forward to spring 2024—neither my migraines nor conversations about such procurement practices have subsided. I can agree that the logic is sound. Shortlist and negotiate amazing, unique, and special value propositions with a select few vendors, in exchange for as much scale as the company can spread between these vendors. Win-win, right?

But ideally, practicality trumps logic. In other words, real-world business needs and constraints, speed to market and outcomes should take precedence over processes and models built around theoretical logic, no? But before we move into the buy side, let’s first look at the sell side:

During vendor panel or shortlisting processes, mature vendors understand that offering steep discounts and competing purely on cost is only going to end one way: initially in painful delivery undertaken begrudgingly, and eventually in poor service outcomes for the client.

But what if there was a way to offer some discounting while it made them look like they’ve tried their best? Enter selective positioning. When clients test the market to identify a “Strategic Vendor” or a “Vendor Panel” for a slew of initiatives or a large upcoming implementation, vendors, among other things review and qualify the client’s appetite and likelihood of procuring all services from a single vendor. If the answer to that question is likely no, then the process of identifying areas that need to be prioritised over others begins. Prioritisation happens based on several factors and levels but the important thing to note is that it may not always be client oriented. The de-prioritised subset may be positioned with larger discounts. 

Unless clients are well-advised or deeply experienced, making the right decisions on value propositions received through RFP responses and ending up selecting the right service mix to inform a three- or four-vendor shortlist becomes highly subjective. But what of the vendors that have gaps in capabilities? They might undertake a similar process but try to out price others in areas where they have large gaps. If chosen, these areas could be positioned as an “investment case” to their management to build capability and IP. However, this could result in clients becoming the guinea pigs. As sourcing advisors, we typically solve this challenge through experience and market insights brought into moderation panels and solution review workshops.

Now, let’s review the buy side: The bad news is that the issue highlighted above is a pittance compared to what clients really lose out on. At the rate of technological acceleration and with AI becoming an ubiquitous standard, companies will need to prioritise agility and innovation by bringing in disruptive new suppliers or collaborators to differentiate and stay ahead of other competitive market forces. By closing their doors to supplier diversity, organisations miss out on true competition and innovation. Worse still, the ‘innovation’ they procure could potentially be an alternative or resale version that is supplied by the vendor on the panel and not the one that creates real value. Reduction in supplier diversity also introduces vendor dependency risks.

This was particularly evident during force majeure events like COVID or cyber events when clients and customers remained in the dark for several hours or days while their services were being impacted. Over time, if panel vendors are not engaged based on outcomes, flexibility and cost efficiencies may reduce as complacency sets in.

In addition to adopting dynamic procurement practices, what are some lateral ways to reduce the risks above? There are several, but here are three ways:

1. Creating in-house capability: This approach may not work across low-scale or highly commoditised service lines, but in areas that are high in strategic importance or value for the company, creating an in-house capability—whether onshore or offshore—could offer a differentiated set of capabilities. This enables access to global talent without the margins associated with outsourcing and provides the local conduit point for outsourced relationships offshore. There are some risks to this model, which I’ll cover in a different post.

2. Outcomes-oriented procurement: If strong capability, qualifications, and confidence in vendors’ performance are key reasons you selected your vendor(s), then the best way to vindicate that decision is by enjoying an outcome-based commercial construct, right? Sadly, over 90% of the legacy contracts we review for re-tendering are either time-and-materials based or transactional pricing. I’ve even been invited on several occasions to try and make sense of vendor pricing and reverse engineer the costs to check value for money.

3. Incentivise retained leadership: Every partnership and capability creation conversation is hopefully a cog in the wheel of a larger execution plan that feeds into the strategic drivers of the company. These are some of the most profound and powerful conversations executives could be having with the leaders of their retained organisation. Sadly, a lot of the time, sourcing or in-house capability creation does not produce the level of transformation it could have delivered because leaders are incentivised to deliver the business case as opposed to using the initial business case as a baseline guide to deliver disproportionately greater value. Perceived loss of power, resources, and annual budgets due to transformation are also deterrents to value creation that can be avoided.

In summary, while controlled procurement practices like vendor panels may provide some comfort around structure, reliability, and efficiency— innovative companies also prioritise the ability to be agile and bring in disruptive new suppliers or collaborators as required. The key is maintaining a balance: the use of panels built on strong advice and insights but remaining agile and in touch with market. This will allow organisations to proactively contemplate new partnerships that can bring cutting-edge technologies or creative solutions.