Value Management in Procurement

Chris Tiernan Managing Partner c.tiernan@grosvenorconsultancy.com Carolyn Jacks Partner c.jacks@grosvenorconsultancy.com Grosvenor Consultancy Services LLP CIPS Central London Branch 15 July 2015 ©2015 Grosvenor Consultancy Services LLP

Grosvenor Consultancy Services LLP

• Founded 1989 – consultancy and interim specialists • Has advised >200 private, public & charity sector

organisations on contracting for and managing IT & service suppliers: www.grosvenorconsultancy.com

• Outsourcing & off-shoring have had mixed successes: – costs & quality – innovation & agility – many services taken back in-house – what of cloud? – CIPS Harrow Jan 2015

• Grosvenor’s Value Management established to address issues, like:

– What do enterprises really want?

CIPS Harrow Feb 2013

Questions to Address

• What exactly is “value” for different types of enterprises and who benefits from it?

• Given limited budgets, how are cases for incurring expenditures made and evaluated to identify the best opportunities?

• What is the difference between investments and costs and should they be managed differently?

• How is progress towards delivering additional value monitored and assessed?

• Who should be held responsible for delivering additional value?

• What traps do suppliers set which reduce the value which can be achieve?

Procurement Processes

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• [Sourcing Strategy] • Prepare SoR & questionnaires • Go to market • Receive proposals • Clarify proposals • Evaluate proposals • Select preferred supplier(s) • Do due diligence • Get approvals • Draft contract • Negotiate & sign • Transition to supplier(s) • Supplier & contract

management • Delivery of goods & services • Monitor market

Why are we doing this?

What have we achieved

for whom?

Creating Enterprise Value

Customers

Donors

For-profit Not-for-profit

Commercial companies

Membership bodies

Government bodies

Charities Protection

rackets

Services for members, citizens

& beneficiaries

Tax payers

Increase in shareholder value

How Value Arises

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Today: from the day to day operations of the enterprise

Future: from changing the ways people interact with the enterprise and work in it so that they create more value from future day to day operations

Optimising On-going Value - Example

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£

Quality/ Quantity

Sales

Service delivered

Projects and Services

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Projects Services

• Limited duration • Delivery risks • Budget limited • Investments • Need to maximise RoI within funds

• On-going • Service risks • Recurring spend • Costs • Need to minimise costs within service levels

The Journey to Additional Value

Business case

Business Change Investment Business Benefits

Service Creation Investment Service Running Costs Value Business case regularly updated & reviewed Vision

Value

+

-

Breakeven point

New capabilities

Improved business performance

Value creation

Investments

Maximising Return on Investment

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RoI

Investment

Types of Procurements

• Commodities with industry standard specifications • Universal services, e.g. cleaning, security guarding • Assets with unique definable specifications • Existing services involving assets & third parties • New services involving third parties &/or TUPE • Projects with unique definable deliverables • Projects with evolving requirements • Professional services with detailed specifications • Professional services with high-level objectives

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Complexity

Business Benefits Identification

• Which of these are business benefits* for those the enterprise exists to serve: a. Freeing up premises b. Reducing staff numbers c. Improving productivity d. Reducing inventories e. Lower supplier charges f. Better management information g. Enhanced customer services h. Greater flexibility?

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* Increase shareholder value for for-profit enterprises or increase quantity/quality of services for not-for-profit enterprises

Business Cases

• Critical to link expenditures to desired value • Not just requests for spending approval • Need commitments on value delivery • Need to follow consistent format for comparability • Need to be updated as work progresses • Critical management tool to determine whether to:

– continue as is – change or – abandon work

• Basis for determining success & learning

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Critical Success Factors

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Carolyn Jacks Partner Co-founder of Grosvenor

Critical Success Factors

• Having realistic expectations • Appointing competent suppliers • Agreeing high quality contracts • Proactively managing suppliers • Having robust change management

• Success = HRE*ACS*AHQC*PMS*HRCM%

50%*50%*50%*50%*50% = 3%

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80%*80%*80%*80%*80% = 33%

Critical Success Factors

• Having realistic expectations • Appointing competent suppliers • Agreeing high quality contracts • Proactively managing suppliers • Having robust change management

• All of the above need to be achieved to a high

standard and they all apply to all stages • Expertise is knowing what the words in orange mean

and what is required in the particular context

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Having Realistic Expectations

• Typical expectations: – reduce costs – improve quality, skills & consistency of supply – decrease management effort – effect transformation in business and/or IT

• Reality testing: – need to understand how the supplier will achieve these

and the underlying economics – what will happen if the supplier is squeezed too much? – question suitability of output based contracts, risk/reward

and partnerships • Remember there are also costs for undertaking the

project & managing the service provision

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Are we likely to get what we are

seeking?

Appointing Competent Suppliers

• Detailed specifications of requirements • Comprehensive questionnaires • Evaluation criteria • Understanding suppliers’ proposals and clarifications • Checking suppliers’ due diligence on you • Checking out suppliers’ references & procedures • Interviewing their staff and rejecting/changing them if

unhappy with them

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Will we have capable people

delivering?

Agreeing High Quality Contracts

• Cater for all circumstances which typically arise over the term and beyond

• Most of the contract is services, charges and procedures related with very little legal input

• Those who will receive and deliver the services must be fully involved in contract negotiations

• In years to come, the contract must be clear to those not involved in drawing it up

• Invariably specialist drafting skills are vital for the schedules which lawyers do not necessarily have

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Is the plan viable?

Proactively Managing Suppliers

• Customers must have their own processes in place • Invariably takes more internal resource than planned • Balance between “getting along” and getting vfm • Regular information and reviews are critical • Contract should be consulted regularly by both sides • Do not accept poor quality or do the supplier’s job for

it (legal implications) • Always have Plans B to Z ready

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How will it be managed?

Robust Change Management

• Change is often a major source of profit for suppliers • An agreed process is necessary but not sufficient • The contract is the baseline • Every variation is likely to affect the contract or

something referenced • Consider up front change costs and the on-going

effects of those, pluses and minuses • The more changes with pre-agreed effects, the

better your control of charges and quality • Keep the contract up to date

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Change is inevitable

Caveat Emptor

• Discounts for commitments & financial engineering • Suppliers hiding behind confidentiality • Actions vs achievements • Properly designing & assessing pilot projects, trials,

proofs of concepts, etc. • What did the suppliers really do for their referenced

customers? • How will your customers judge their success? • Who is holding whom to account for success? • Suppliers need MORE management than managing

in-house resources

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VM in Procurement Conclusions

• what “value” is for your enterprise • how value arises & for whom • how what is being procured affects value creation • how the procurement processes affect value creation

– the Critical Success Factors • how suppliers’ business practices affect overall value

created

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Need to understand:

For more information: c.tiernan@grosvenorconsultancy.com c.jacks@grosvenorconsultancy.com

Downloadable papers from: www.grosvenorconsultancy.com

Thank you