Tony Colwell - 17 November 2011
This article is the fifth in a series on how to avoid the pitfalls of centralised procurement.
In the first article I commented on the reasons why, when many large organisations embark on centralised procurement initiatives with the promise of substantial savings, direct increases in profitability fail to materialize within the business units.
A discussion to capture the views of other procurement professionals has been running at Procurement Professionals Group on LinkedIn.
This week I shall analyze the comments - 157 at time of writing this article - from 65 contributors, excluding myself.
As a piece of qualitative research, the discussion was not intended or designed for quantitative analysis. I have attempted, nevertheless, to identify, normalize and count the reasons for failure mentioned by the 65 contributors. Whilst I accept that the validity of this analysis is questionable, I do feel the results give some valuable insight to the causes of failure, and possible areas to be given attention in order to deliver a successful centrally-led procurement programme.
First I shall comment briefly on the method of analysis.
The initial comment from each contributor was examined and the key reasons identified. Typically contributors gave between one and four reasons. A few contributors gave no reasons in their first comment (for example one contributor's first comment was a question) but did so in their second comment. In such cases the reasons in their second comment were identified. Collectively, I have called these 'original mentions'.
Some contributors posted several comments, restating and clarifying their views. I chose not to count the subsequent mentions of their original reasons. Also, in their later postings, some contributors were debating others' reasons and, again, I chose not to count these mentions.
The reasons were listed and normalized to produce the 16 Reasons listed in Table 1. A few reasons we unclear or ambiguous, so they were categorized as "Other".
Two counts are listed against each of the 16 Reasons. The counts are also expressed as a percentage of their respective totals. The first is the total count of 'original mentions'. The second is a weighted value calculated by attributing to each contributor a total value of 1 shared equally across his/her reasons. For example, if a contributor provided 4 reasons each was given a value of 0.25. The first count gives equal weight to each mention, and the second count equal weight to each contributor.
There are a total of 109 mentions from the 65 contributors.
Table 1
The most frequent reason given for failure of cost savings initiatives to deliver to the bottom line, was Procurement's lack of understanding of the true costs and resultant savings. This was a clear leader followed, some way behind by the next 3 reasons, grouped in close proximity to each other (in order dependent on the number of mentions or weighting by number of contributors).
Poor planning and leadership/unclear objectives covered a range of procurement management-related reasons, including misdirection and inappropriate pursuit of cost reduction where other objectives (e.g. quality or efficiency) were deemed more important. Savings redirected refers to redirection within Business Units or by budget holders, for example where budgets are not adjusted downwards to reflect the procurement savings, or where savings are passed on to customers. Comments relating to savings taken centrally and not passed to BUs or budget holders, for example central rebates, were counted separately. Inadequate stakeholder engagement was the third reason in this following group.
Arguably, lack of stakeholder engagement is a cause of other failures, notably lack of understanding of the true costs, unplanned redirection of savings, delays and non-compliance. Contrary to the results, it is my belief that inadequate stakeholder engagement is the number one reason for failure and that these other causes are symptomatic. The discussion thread gave some support to this hypothesis but the construct of the research provides no means of testing it objectively.
Readers may be interested in the article "7 Essential Elements of Stakeholder Engagement" in which I give a pragmatic guide to ensuring stakeholder engagement in projects and programmes.
Economic factors, e.g. inflation, exchange rates were given as a reason but, arguably, these should be forecast and any losses offset by comparable gains. Failure to forecast was included here rather than in costing inaccuracies.
Inadequate follow through/contract management refers to the disengagement and dissociation of Procurement after setting up the contract. This behaviour might be reinforced by performance measures based on theoretical 'contracted savings' rather than 'realized savings', with non-compliance being a major reason for the difference between the two.
Inadequate sponsorship refers to sponsorship by C-level executives, as distinct from procurement leadership covered in an earlier Reason.
Conflicting metrics and conflicting incentives, and a lack of joined-up KPIs across departments and functions, can encourage non-compliance especially if communications and stakeholder engagement are poor.
Lack of necessary skills refers to the capability of procurement management and staff. We might expect this reason to be understated given that the contributors were mainly from the procurement function.
Optimistic timescales and delays in achieving savings (doing the right things more slowly than planned) were identified separately from other planning and control issues (doing the wrong things) covered in an earlier Reason.
There was a specific reference to contrived savings, or fabrication of results, which was worthy of mention separately from costing inaccuracies.
Finally, the practice of taking savings centrally to withhold them from BUs and budget holders was discussed, and views expressed regarding the adverse effect this may have on relationships with some stakeholders.
I hope that any readers involved in a centrally-led procurement programme will find this analysis helpful as an aid memoire when considering the risks to successful delivery to the bottom line.
Individual comments and the opportunity for readers to post their own comments are available in the discussion "Why do so many procurement cost saving initiatives fail to deliver to the bottom line?" in the Procurement Professionals (Open) Group on LinkedIn.
Tony Colwell - 10 November 2011
In my recent series of articles "Avoiding the Pitfalls of Centralised Procurement" I wrote on the subject of starting a strategic, value-creating procurement programme. Last week I reflected on the
identification of suppliers that will create or add value.
Central to my argument was the need to assess the supplier's capability to collaborate and innovate, to help us optimize existing products/services, and to achieve our desired business outcomes. Rather than focus exclusively on the required product or service we need to pay attention to supplier evaluation and pre-qualification.
This week I shall be commenting in more detail on the methodology for supplier appraisal and how I tailor my approach to meet the requirements of corporations and individual businesses within their specific industry context.
My aim is not to repeat the advice of other guides but rather to suggest to readers that they develop their own approach. Why should we do this when there are 'best practice' templates to follow? Anyone who is familiar with push and pull strategies in supply chain management will understand the advantages of pull strategies when it comes to meeting customer-specific requirements. My point is the supplier appraisal design can be 'pulled' by (external and internal) customer values rather than 'pushed' by generic best practice. Competitive advantage is elusive and uniquely interwoven with the customer values within a supply chain.
Generic templates are fine for generic results. If you are looking for the truly exceptional, then you need a differentiated approach... one tailored to your, and your customers', specific needs.
Here we are looking at supplier evaluation and pre-qualification processes mainly for partnerships. We perhaps need to qualify where partnerships are appropriate. For other types of relationship a generic approach may be more than adequate. To be clear, I am not saying that the design of appraisals for partnerships should be totally new. There will be important elements - for example financial background - which can be taken from generic 'best practice' models. I would encourage appraisers to review and use elements of existing published models and then add criteria appropriate to their specific needs. (I'll come to this later.) Also It helps to know your subject before trying to develop a new approach...
so first I shall recommend a couple of good sources of advice on general practice.
The first source is the Supply Management (CIPS) “Guide to... Supplier Appraisal” - an excellent concise guide to pre- and post-contract appraisal, and a recommended read for anyone new to the subject. It defines supplier appraisal as follows:
"Supplier appraisal is the evaluation and monitoring of supplier capability to ensure successful delivery of commercial outcomes. It is an essential part of strategic sourcing, supplier management and securing competitive advantage."
Whilst it identifies supplier appraisal as essential to securing competitive advantage, the Guide offers no substantive connection between appraisal and the means by which competitive advantage can be secured. The pre-contract appraisal focuses on risk mitigation rather than the identification and exploitation of opportunity:
"Conducting checks – or due diligence – on your potential supplier does not guarantee there won’t be any future problems, but it will help reduce the chance of them arising."
"...an appraisal process is usually used if any, or a combination, of the following contract conditions exist:
• High value;
• Highly complex;
• Long term;
• Business critical;
• Likely to affect reputation;
• International in nature;
• It would be difficult to change suppliers;
• The market has a limited number of suppliers."
My particular interest is in 'business critical' conditions. One needs to be wary of the presumption that Procurement knows exactly what conditions are business critical. While there will be business critical conditions that are apparent to all, there are usually some (especially opportunities) that go unnoticed... and not just by Procurement! These less obvious conditions or opportunities are often the source of competitive advantage. (If they were that obvious then everyone, competitors included, would be addressing them!)
The second source is a research paper "Supplier Evaluation Framework Based on Balanced Scorecard with Integrated Corporate Social Responsibility Perspective" by Worapon Thanaraksakul and Busaba Phruksaphanrat (2009)
The authors developed an evaluation framework from a literature review of 76 papers related to supplier selection criteria. The original evaluation frameworks were conducted in various contexts, and some papers reviewed multiple selection models. From their review, Thanaraksakul and Phruksaphanrat created a generic model - ranking the selection criteria based on frequency of appearance. Given the varied contexts of the original frameworks, individual criteria would have assumed differing importance and been given different weightings. The ranking in the generic model does not take this into account, and I would advise readers not unwittingly to infer that the ranking has any significance to their own circumstances.
I feel I also need to comment on Balanced Scorecard ("BSC"). BSC is ultimately about choosing measures and targets associated with the main activities required to implement a business strategy, not a supplier appraisal tool. (Readers might also consult the EFQM Business Excellence model which is more aligned to achieving excellence through continuous improvement in business processes and management.) BSC aims to provide a 'one size fits all' set of metrics to be cascaded down and across the business, and a balance between the 4 perspectives: Financial; Customer; Internal Business Processes; Learning & Development (5 perspectives if you include Corporate Social Responsibility). The Balanced Scorecard Institute (a private company) acknowledges that these perspectives may not be relevant to non-profit organisations or units within complex organisations, which might have high degrees of internal specialisation. In pursuit of supplier partnerships we may be looking for specialisation and skewed focus i.e. within a particular context, very specifically at certain criteria.
Having criticised BSC for supplier pre-contract appraisal, I can thoroughly recommend Thanaraksakul and Phruksaphanrat's paper as a source of generic supplier appraisal criteria.
As a third source, readers with special interest in quality assurance might look at the International Society for Pharmaceutical Engineering's
Good Automated Manufacturing Practice Guides. which deal with supplier audits. The assurance demands of automation in this highly regulated industry are particularly challenging, so the GAMP guides are very thorough. The focus on validation planning and supplier due diligence have relevance to answering the question "Is the supplier able to perform?"
The Guides are not cheap, but a quick scan of the contents pages may give a few ideas and help determine if a purchase is worthwhile.
Now I shall address the identification of suppliers that warrant a tailored appraisal, and then the tailoring.
Supply Management proposes the use of Kraljic's Purchasing Portfolio matrix (1983), which plots profit potential against supply vulnerability. The recommendation is to apply the most rigorous appraisals to the high profit potential, high vulnerability quadrant. Most procurement professionals will be familiar with a number of similar 4-quadrant 'supply positioning'models that have been developed subsequently, for example Elliott Shircore & Steele's Procurement Postioning (1985), and Van Weele's Purchasing Portfolio (2000).
'Supply positioning' models convey important concepts but have significant weaknesses in their practical application to supplier appraisal:
• they are intended for purchase items or categories, not suppliers; individual suppliers may therefore span more than one quadrant;
• the supplier's side of the supplier/buyer relationship is disregarded;
• they pose unanswered questions about what will be positioned, at what level of aggregation, and for what organizational unit will the analysis be performed.
In practice, if you perform a portfolio analysis on individual categories you will often identify component groups that map across different quadrants of the grid; then when you look within component groups you may find individual items sit in different quadrants; different mappings are generated with different operating units, and so on. So whilst Kraljic and the like are informative in terms of an overview, they do little to connect specific critical issues and opportunities to supplier capability.
In order to address these issues I've developed my own matrix, based on 'intrinsic value' (as value is what we are ultimately trying to deliver):
- to perform item/category analysis (supply postioning) from an operational perspective
- to link to Value Chain Analysis for the strategic and supplier perspectives.
This enables the use of a common rating/ranking system across strategic and tactical opportunities.
Value Chain Analysis ("VCA") answers the aggregation and organisational questions left unanswered by supply positioning. The point about VCA is that it circumvents the portfolio analysis. VCA will identify critical requirements which cannot be resolved in-house and therefore require solutions to be procured. If VCA does not highlight an opportunity or risk, then the required relationship is probably non-strategic and non-partnership. Note that there may be partnership requirements with the same supplier in other value chains.
(This emphasises the need to perform a strategic analysis before embarking on tactical cost-reduction programmes. See article "Strategic or Tactical Cost-Savings Programme?")
The other things that VCA addresses:
• VCA exposes critical issues and previously unrecognized (or inactive) opportunities,
• within very specific circumstances-within-business-within-industry context... to gain competitive advantage,
• and links these specifically to required supplier inputs.
You will know, beyond the generic requirements, specifically what you are looking for in your key suppliers.
If you have performed VCA you have the information to tailor the supplier evaluation matrix.
Regarding the BSC format, conceptually, the range of criteria is a good: we need to consider all angles. But differentiation - the source of competitive advantage - may be very unbalanced. We may be looking at a focus on specific bottlenecks or opportunities for which the overall scorecard may have little relevance. Additionally, BSC has always been subject to criticism that the content of each perspective is somewhat arbitrary. The focus on defining a simple set of broadly applicable measures conflicts with the requirements for a comprehensive set of criteria both to mitigate supply risks and appraise partnership potential. Arguably, a more comprehensive version can be used for pre-contract appraisal; then a consistent, stripped-down version containing only key performance measures could be used for post-contract review. Personally, I do not like the format for pre-contract appraisal, mainly because I can see a more logical and helpful structure.
My 3-part supplier appraisal separates
(1) Readiness - the physical attributes (requiring action to modify), from
(2) Willingness - the metaphysical (subject to influence, to reasoning and persuasion), and
(3) Ability - the evidential, reasoning material, which indicates the supplier's power or capability to translate the metaphysical into the physical... to realize the dream!
I find this format more conducive to developing a supplier management strategy.
To recap, my appraisal format is in three parts:
Is the supplier ready? Does the supplier have the right infrastructure technology and resources...the appropriate means to provide the products or services you need? Potential suppliers may not have the product or service today, but the capability to provide it. (Perhaps there is a reverse marketing opportunity?)
Is the supplier willing? What are the supplier's values, market orientation, direction and strategy? How flexible and adaptable are they, operationally and commercially? Are you aligned, and will you be a valued customer?
Is the supplier able to do business? Some suppliers may have the right infrastructure, technology and resources; they are focusing on the right market; they express similar values; they say they want your business. The promise is there, but they simply fail to deliver. So, here, we are looking for demonstrable capability to perform.
I am not going further to populate the three categories but I will comment briefly on weighting and scoring.
'Best practice' guides generally refer to weighting the criteria. Preparing and agreeing a weighting system with stakeholders can be a lengthy task. Although I do it, in practice I have never found weighting was necessary; I've never performed a partnership evaluation that came down to the weightings on individual criteria. I do advise that you classify criteria, to be clear what is essential, highly desirable or nice to have.
When it comes to rating, make scores as objective as possible. I like to use a 7-point Likert-type scale: a supplier may have attributes that support or run counter to the achievement of your objectives. A negative score might apply, for example, if a supplier had a strategic relationship with a competitor which would impact adversely on their willingness to support your business.
Finally, the numbers are an aid to stakeholder discussion and agreement. I would never reduce the process to an evaluation by numbers - to a decision based on total score.
I am inviting the views of procurement professionals. and other readers who may wish to comment, at
"
How would you assess a supplier's capability to collaborate and innovate, and to create value in your business?" in the Procurement Professionals (Open) Group on LinkedIn.
Related Items
Readers may also be interested in the discussion "
Why do so many procurement cost saving initiatives fail to deliver to the bottom line?" at Procurement Professionals (Open) Group on LinkedIn.
References and further reading
The Supply Management (CIPS) "Guide to... Supplier Appraisal",
Very similar: "How to appraise suppliers" - CIPS Knowledge Works (available for download on the Chartered Institute of Purchasing & Supply Web Site)
"Supplier Evaluation Framework Based on Balanced Scorecard with Integrated Corporate Social Responsibility Perspective" - Worapon Thanaraksakul and Busaba Phruksaphanrat (2009)
Information on the purpose and application of Balanced Scorecard at The Balanced Scorecard Institute (private company)
"A Study to Compare Relative Importance of Criteria for Supplier Evaluation
in e-Procurement - Ashis Kumar Pani and Arpan Kumar Kar (2007)
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Tony Colwell - 3 November 2011
In my recent series of articles "Avoiding the Pitfalls of Centralised Procurement" I wrote on the subject of starting a strategic, value-creating procurement programme, and subsequently went on to give
10 tips for the use of Value Chain Analysis.
This week I want to reflect on the identification of suppliers that will create or add value.
My theme for this week was influenced by a recent
video of sales trainer Eric Loftholm in which he talks about the importance of collaboration, innovation and optimisation in the sales process.
When engaging with suppliers of strategic goods or services - repetitive supplies, or one-off purchases that have a continuing maintenance requirement - we can often create value through collaboration, innovation and optimisation. We need to focus on the business outcomes we are trying to achieve not simply on our perceived input requirements. Procurement generally focuses on the required product and, often, not enough on the inherent capabilities of the supplier. We need to assess the supplier's capability to collaborate and innovate, to help us optimize existing products/services, and to achieve our desired business outcomes.
The implications of such 'product' focus in public sector procurement are all too evident. There are many areas (ICT for example) where rapid change can render products and services virtually obsolete by the time they are deployed. Similar failings are less visible in the private sector, where the procurement processes are more agile, and greater flexibility exists to change specifications or source add-ons. But the symptoms are manifest: excessive complexity and fragmentation; cost overruns; supplier margin creep; failing 'partnerships'; suppliers either lacking commitment or gaining a stranglehold over customers.
The answer, I believe, is better supplier evaluation and pre-qualification.
The public sector procurement process mandates that all suppliers are treated equally... the intention is to level the playing field... the outcome is that mediocre suppliers get carried though the process. The process appears to be founded on unreliable assumptions: that there are multiple suppliers who are capable; good suppliers will be keen to supply; their products will be similar and can be evaluated against a single specification.
The reality is this: in the supply of all but the most basic commodities there will be one supplier best placed to meet the customer's needs. Procurement's task is to identify and contract (not necessarily exclusively) with that supplier. This is particularly important in strategic categories, where reverse marketing may also be beneficial. Success cannot be guaranteed by focusing on the product alone. The boundary of the supplier and customer's interactions - the optimum solution - will be determined by the supplier's capability... more precisely, by the supplier and customer's relative capabilities across a broad spectrum of requirements.
So how do we identify the best supplier? How do we evaluate capability?
A former colleague and purchasing manager, Bill Weinert, once said "There are only three questions you need to answer: is the supplier ready, willing, and able to do the business? " It was a great piece of advice that I've taken and developed into a supplier appraisal process. The process is tailored to the specific value creation opportunities within a business, which I'll save for a future blog. For now, I will outline the basic principles.
Is the supplier ready?
Does the supplier have the right infrastructure technology and resources...the appropriate means to provide the products or services you need? Potential suppliers may not have the product or service today, but the capability to provide it. (Perhaps there is a reverse marketing opportunity?)
Is the supplier willing?
What are the supplier's values, market orientation, direction and strategy? How flexible and adaptable are they, operationally and commercially? Are you aligned, and will you be a valued customer?
Is the supplier able to do business?
This is the more difficult of the three questions. Some suppliers may have the right infrastructure, technology and resources; they are focusing on the right market; they express similar values; they say they want your business. The promise is there, but they may still fail to deliver. So, here, we are looking for demonstrable capability to perform.
Conventional supplier audits can tell us a lot: do suppliers have the processes, assurance systems, training, etc. Supplier audits, and procurement due diligence, are usually directed at validating and verifying suppliers' 'readiness', rarely on validating their 'willingness'.
The validation of suppliers' willingness needs to be prospective, not retrospective. Negotiations often play on suppliers' willingness to compromise in order to make a sale; this should not be confused with willingness to perform in the longer term. The key attribute is free will, not the product of coercion. Attempts to gain co-operation by contractual means (obligations and warranties) are not the answer; this amounts to use of force. As I explained last week - in my blog
"Are your Procurement stakeholders champions or saboteurs?"
- force can only guarantee reluctant compliance. And reluctant compliance is not a foundation for collaboration and innovation.
We need to look beyond the conventional audit criteria... to ask "What are this supplier's motivations to collaborate and innovate?" and then, "How do we validate these in our specific context?"
Next week I shall be commenting in more detail on the methodology for supplier appraisal and how I tailor my approach to meet the requirements of corporations and individual businesses within their specific industry context.
In the meantime I am inviting the views of procurement professionals. and other readers who may wish to comment, at
"
How would you assess a supplier's capability to collaborate and innovate, and to create value in your business?" in the Procurement Professionals (Open) Group on LinkedIn.
Related Items
Readers may also be interested in the discussion "
Why do so many procurement cost saving initiatives fail to deliver to the bottom line?" at Procurement Professionals (Open) Group on LinkedIn.
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Tony Colwell - 21 October 2011
Last week as part of my series on Avoiding the Pitfalls of Centralised Procurement I wrote an article "How to Start a Strategic Value-Added Programme." I commented on the use of Value Chain Analysis ("VCA") which was developed by Harvard strategy guru Michael Porter. In developing VCA, Porter addressed the limitations of his Five Forces model. Whilst Porter's Five Forces model has been taken up extensively by the Procurement community as a strategy development tool, VCA remains little used despite its superior capability.
In this article, I give my tips on the use of VCA in the context of developing procurement strategies. Readers will benefit from prior knowledge or reading on the subject. VCA experts may disagree with my approach - it does deviate from Porter's concept - for which I make no apology. My reasons will become apparent.
First I shall recap on the VCA steps that I outlined in a little more detail last week.
5 steps to developing procurement strategy using Value Chain Analysis:
(1) Create a model of the value chain, setting out the key activities.
(2) Capture external factors and customer values.
(3) Assess the relationship between customer values and key activities. Assess the potential to create differentiation and cost advantage.
(4) Determine operational strategies whereby value to the customer can be most improved, and competitive advantage can be most enhanced and sustained.
(5) Determine procurement strategies to support the operational strategy needs and maximise added value.
Michael Porter said, " In a world where managers are prone to look for simple prescriptions, detailed activity analysis was and is challenging." Value Chain Analysis as prescribed in full by Porter is indeed a challenging and intensive exercise. For our purpose it doesn't need to be.
Here are my 10 tips for running Value Chain Analysis
The first two are suggestions for limiting the scope and simplifying the process:
Tip #1 Be clear on the purpose
If you are using Value Chain Analysis to develop procurement strategy, not as part of a larger programme to formulate business strategy, you are likely to encounter some resistance from other functions. Functional heads may think Procurement is trying to interfere in the formulation of their strategies. Rather than try to re-define business strategy, use VCA as a tool to "listen" to the strategies of other functions. VCA will capture their objectives and how these link, or not, to customer values. This can enable other functions to discover for themselves flaws or holes in their own strategies, and inconsistencies between strategies... also to find new ways of operating, and new ways of using the procurement function to add value.
Tip #2 Limit the scope
VCA examines two sources of competitive advantage: cost leadership and differentiation. If you are not the clear cost leader in your markets, focus on procurement alone is unlikely to achieve that position. The analysis of cost structure is an intensive, numerical process. Use the cross-functional team to focus on opportunities to develop differentiation. Rely on the subjective views of participants: opportunities to create better value-for-money and to take cost out of the value chain will be identified. You can always re-evaluate these later by more objective, numerical analysis.
Purists may argue that these two suggestions deviate from Porters concept. Porter failed to address some of the practical issues of conducting VCA, in particular how to deal with the commercial risk when involving suppliers or customers. Focusing on differentiation rather than cost reduction mitigates the risk; it also lends itself to use of cross-functional workshops, which promote collective ownership.
Tip #3 Reflect on project management methodology and communications
Even if you go for a narrow scope VCA (as suggested above) it is going to touch all areas of the business. You will need appropriate sponsorship and buy-in at senior level, you will need to borrow some key people, and you will gain from communicating to all people who would normally be involved in strategy formulation. You may not be setting out to re-write their strategies but you will be re-writing the way they are supported by procurement; so the strategy makers need to be given the opportunity properly to communicate their strategies. Ultimately, all employees, regardless of their distance from the strategy development process, will need to know what is expected of them but at this stage we are concerned with strategy formulation, not execution.
I am not going to comment on formal project management methodology or advocate its use, but I would suggest that VCA users consider what is appropriate for their circumstances.
Tip #4 Determine the general approach
Value Chains exist at business level, not at corporate level. Businesses may have more than one value chain. This will either be self-evident or will emerge during the VCA session. If evident in advance, you have two options: (i) run entirely separate sessions for each value chain, or (ii) run a session to capture overarching business drivers, issues and objectives, then run separate sessions for each value chain. The advantage of (i) is that participants will be involved in the entire process for the value chain in which they are stakeholders; the disadvantage is that you may be duplicating analysis of similar activities. The advantages of (ii) are that you can engage a broader range of stakeholders (e.g. more senior for the overarching session, more junior for the others) and avoid duplication; the disadvantage is the potential for a disconnect.
Tip #5 Propose the Activity Categories
It helps to have a straw man to take to the first session and to guide your team selection. Aim to use the same categories for all sessions; you may have to make exceptions, but try to avoid unnecessary differences in the models for each value chain. Multiple models will confuse stakeholders and make consolidation of outputs difficult.
Tip #6 Select your team
Ideally all the categories need to be represented. I find workshops are easiest to run with 7 people and become increasingly difficult as numbers increase. So immediately we are looking for a compromise. I once ran a VCA workshop with 22 participants, but would try to keep numbers to 12 or less. You may be able to leave out some or all support activities. You may need to run multiple workshops, for example (a) as suggested in tip #5 above, or (b) separate workshops, one for primary and one for support activities.
There are three important characteristics required of team members. Ideally they will be:
• creative and open-minded. The conservative and critical can have their input later.
• from the same peer group. No individual must be overly dominant, so don't put the MD with junior staff!
• sufficiently senior and established within the business. They need to understand the business and its current direction, and be able to challenge existing strategy. Typically, you would be drawing from BU Executive or the level below. In split sessions - i.e. 4(ii) above - you might draw from 3 levels... no more.
Tip #7 Make sessions easy for participants
VCA sessions are held in cross-functional workshops. I like to run workshops that require no preparation by participants. You will need to do some work on the outputs but that should not require all participants to be present, or put big demands on other stakeholders.
As a piece of practical advice - to minimise digressions into non value-adding activities - my 'rules of engagement' for participants in VCA would include the following definition of a value chain:
• A Value Chain is the chain of activities that add value to a product
• Value exists only where a customer need is satisfied
• Any activity or process that does not serve a customer need is not part of the Value Chain
Tip #8 Separate idea generation from evaluation
The process of working from the customer interface down the primary categories, looking at the impact of customer values, is a fairly logical process but one that should not exclude creative thinking. This is especially important when it comes to identifying opportunities for differentiation and enhancing competitive advantage. Apply 'brainstorming rules' to encourage free thinking: let the ideas flow, then evaluate the ideas after running through all primary categories.
Tip #9 Pay attention to linkages and information flows
Porter highlighted that the linkages between activities and, indeed, vertical links up and down the value chain (including links to suppliers and customers) are a key source of competitive advantage. The key to linking activities together in a way that gives a company an advantage over others is to understand the flow of information that occurs between the various activities.
Tip #10 Involve trading partners with great care
The configuration of activities for competing in a particular way also shapes the appropriate contractual relations with other firms. Exploring the linkages between activities demands the involvement of cross functional teams and possibly the involvement of trading partners. The risk of involving trading partners in VCA sessions is the potential loss of commercial advantage and margin: "the portion of the created value we are capturing" may be lost to the trading partner.
It is safer to leave trading partners outside of initial analysis... until you have sufficient experience and a properly formulated negotiation plan to deal with commercial issues. In most cases it is better not to involve suppliers in the workshops but take specific outputs to them later. VCA might highlight issues, opportunities, or required outcomes; how those issues might be addresses, or the outcomes achieved, would be up for discussion with relevant suppliers.
In introducing VCA last week I wrote "If Procurement has never engaged in such an exercise, Pareto will almost certainly apply: 80% of the benefit from
20% of the effort!" I hope I have encouraged readers to explore the use of VCA for procurement strategy, and that these 10 tips will be of help in developing
a practical approach without too much effort.
Join the discussion, "
Tony Colwell - 14 October 2011
This article is the third in a series on how to avoid the pitfalls of centralised procurement.
In the first article I commented on the reasons why, when
many large organisations embark on centralised procurement initiatives with the promise of substantial savings, direct increases in profitability fail
to materialize within the business units. In my second article I compared strategic
and tactical cost-savings programmes and exposed some of the myths associated with tactical programmes.
A discussion thread
to capture the views of other procurement professionals has been running at Procurement Professionals Group on LinkedIn.
This week I want to touch on the subject of starting a strategic, value-creating procurement programme.
In another Procurement Professionals Group discussion thread,
"Are savings the wrong way to report procurement department performance?"
Bill Young introduced a paper co-authored with Charles H. Green, which provides some interesting insights to the cause of unresolved conflicts between
Procurement and its internal clients, and the reasons why Procurement is often less strategic than it would like to be:
"Procurement today is a complex management service, intended to support the strategic aims of the organisation. However, some of Procurement’s intended
customers are confused about its role and intentions, and hence don’t trust its motives.
"We argue that trust is fundamental and essential in the type of relationship that Procurement is aiming for, but that the metrics and governance used
by Procurement are antithetical to its aims."
I would recommend any reader involved in, or about to set up, centralised procurement to read this paper.
Returning to the discussion I initiated, some observations by contributors have been directed at the need to create value rather save costs:
"Most procurement [departments] are measured on savings - not on value creation,"
"Savings... should leave room for innovation, improved quality, shorter lead times, and not be a bottleneck... [to benefits delivery.]"
"...the same spend with increased revenue, throughput, etc."
"... a truly strategic sourcing group delivers value....."
And the most influential comment, a question:
"What portion of the created value are we capturing?"
This leads me to comment on a technique I like to use to engage stakeholders and identify value-creation opportunities - and a good first step in
developing trust and in determining the strategic objectives of procurement - Value Chain Analysis ("VCA").
The value chain was a concept initially proposed by management consultants McKinsey and later developed and made public in 1985 by Michael Porter in his
book, "Competitive Advantage: Creating and Sustaining Superior Performance". I was fortunate in my earlier corporate career to participate in a joint
supplier/customer VCA programme run by McKinsey. That particular programme was designed to inform and develop marketing strategy for a major
petrochemicals company (the supplier). I took the concept and turned it on its head; now we are using it to inform and develop value-focused procurement
strategies.
Porter's Five Forces and SWOT analysis have become generally accepted tools for the development of procurement category strategies. Despite Porter's
development of VCA as a more relevant tool, I have not seen VCA used by Procurement anywhere other than where we have introduced it. I have seen the
term used, but it has been misinterpreted as cost analysis of suppliers using conventional accounting structures, which VCA is most certainly not.
Michael Porter published Value Chain Analysis in 1985 as a response to criticism that his Five Forces framework lacked an implementation methodology that
bridged the gap between internal capabilities and opportunities in the competitive landscape. Whilst Five Forces and SWOT have their place, properly
deployed VCA is much more rigorous and productive. The Five Forces model applies to all competitors within an industry or market. SWOT provides a simple
framework for individual companies but relies on the user to determine the scope, which leaves the capture of all relevant factors very much to chance. By
contrast VCA provides a tailored and structured framework to identify company-specific strengths, weaknesses, opportunities and threats, and to develop
strategies, within the context of a very specific competitive landscape. This includes vertical links to customers and suppliers... value
creation from procurement and supplier contractual relations.
Whereas Five Forces and SWOT can be conducted by the procurement team, VCA has to be performed by a cross-functional team. This brings substantial benefit
as the cross-functional team members develop shared strategies and a clear understanding of how those strategies both determine and support their individual
objectives.
The value chain allows an organisation to understand what activities it performs, classify them into primary and support activities and most importantly
of all, understand which ones add value to the customer. Porter proposed 9 categories of activities:
- 5 categories of primary activities - inbound logistics, operations, outbound logistics, marketing and sales, services
- 4 categories of support activities (so called because they support the primary activities) - procurement, technology development, human resource management, infrastructure.
These 9 categories can be further subdivided by analysts into their firm's industry-specific and business-specific activities.
Successful use of VCA may challenge Porter's original generic model. I prefer to tailor the value chain at the category level. Despite Porter's claim
that the 9 generic categories exist in every business, they do not work well for some products and many services. For example, in developing a
procurement strategy (unclassified) for military support services (which excluded the procurement of military hardware platforms and associated
dedicated services) we found that Porter's classifications were far from ideal. We defined 6 primary categories: recruiting; basic training, equiping; collective training;
mobilization; deployment. My point is that Porter's classifications are not sacrosanct. The important things to recognize are that the definitions must reflect
business terminology, and the disaggregation of activities must be sufficient to reveal the sources of competitive advantage, whether they be in primary or
support activities.
There are 5 steps to developing procurement strategy using Value Chain Analysis:
(1) Create a model of the value chain, breaking down a market vertical/organisation into its key activities under each of the classifications. Include
upstream links/channels.
(2) Consider the macro-environment, and external factors. What are the factors impacting on the markets and customers? Capture, explicit and implicit customer needs, known customer
values and trends that will affect customer values.
(3) Working from the customer interface down the primary categories, assess the impact of (internal as well as external) customer values. Capture key
objectives and critical success factors within each key activity. Within each key activity assess the potential for enhancing value. Consider points of
differentiation and areas where the business appears to be at a competitive advantage / disadvantage. Capture opportunities to enhance value (and to
defend existing competitive advantage). Move on to consider and capture opportunities to add value through support activities.
(4) Determine operational strategies built around focusing on activities where value to the customer can be most improved, and competitive advantage
can be most enhanced and sustained.
(5) Link opportunities captured in step 3, and strategies in step 4, to procurement activities and to suppliers. Determine procurement strategies to
support the operational strategy needs and maximise added value.
Michael Porter said, " In a world where managers are prone to look for simple prescriptions, detailed activity analysis was and is challenging."
A full analysis of the value chain as set out in "Competitive Advantage" is indeed a challenging and intensive exercise. For our purposes it doesn't
need to be. If Procurement has never engaged in such an exercise, Pareto will almost certainly apply: 80% of the benefit from 20% of the effort!
Next week I shall be giving my tips on running the Value Chain Analysis process.
Join the discussion, "
Tony Colwell - 7 October 2011
This article is the second in a series on how to avoid the pitfalls of centralised procurement. In last week's blog, I commented on the reasons why, when many large
organisations embark on centralised procurement initiatives with the promise of substantial savings, direct increases in profitability fail to materialize
within the business units. A discussion thread
to capture the views of other procurement professionals has been running at Procurement Professionals Group on LinkedIn.
This week I compare strategic and tactical cost-savings programmes and expose some of the myths associated with tactical programmes. I'll also be raising
relevant points captured in the LinkedIn discussion, in particular in connection with adding value rather than simply reducing costs.
The comparison is in the context of a newly formed central procurement organisation. Similar arguments may be made for new programmes run by an
established central organisation, the arguments getting progressively weaker with increasing level of procurement capability maturity.
(Note: beyond level 3 of a 5-level Capability Maturity Model the organisation is operating in strategic, value-adding mode.)
Before going any further it is necessary to make clear that tactical and strategic programmes are, to a large extent, mutually exclusive.
The strategic approach demands portfolio segmentation and the adoption of differentiated approaches for each segment. There are various models for this
(supply positioning for example) and a host of tools and techniques - which I will not go into here - for determining and applying approaches appropriate
to each segment. The tactical programme dispenses with the analysis and segmentation, applying a more uniform approach across all categories, typically
based on supplier rationalisation and leverage.
Later, I will argue that not only are these programmes mutually exclusive, but also the potential to switch from tactical to strategic - and the
potential to gain strategic benefit - is progressively diminished as the tactical programme is pursued.
Moving on to the comparison, first let us consider the typical measurement of procurement cost savings. Savings are usually measured by purchase price
variance for directs, and by similar 'input' measure for indirects. For sake of simplicity, I will refer to these measures collectively as "PPV" measures.
Figure 1 shows the progress of fast tactical and strategic programmes based on PPV measures.
Figure 1
Advocates of tactical cost-savings programmes argue that they achieve quick results. Some Big 4 Consultants and specialist purchasing consultancies run
fast tactical programmes claiming both quick results and that the cumulative savings of a strategic programme rarely catch up with the tactical approach.
Clients may be seduced by this simple message; it's what they want to hear... the promise of quick wins! But the truth is seldom that simple. When I've
made my case, I'll leave readers to speculate as to whether the advocates are proffering a deliberate distortion or whether they are just naive.
Figure 2 includes the hidden costs of the fast tactical programme and the additional benefits of a strategic programme.
Figure 2
The "hidden costs" are hidden and unquantified because the tactical programme does not allow the time to identify, design and measure how and where
collateral damage will occur. This is one of the main reasons why tactical cost-saving programmes in particular fail to deliver to the bottom line.
Hidden costs might include impact on quality, outputs and waste, as I covered at length last week, or unmanaged risks, for example exposure to insecure
supplies, currency variations, etc.
The additional benefits of a strategic programme come from:
• better stakeholder engagement and use of cross-functional teams
• development of joined-up KPIs and functional targets/incentives
• focus on total cost of ownership,
• risk mitigation across relevant segments/categories
• benefits of supplier partnerships and their innovations
• pursuit of value-adding opportunities
• better analytics
• control of maverick spend
• higher levels of compliance
A strategic programme does not preclude the possibility of pursuing quick wins - just that the approach will be verified and, for a given level of
resource, fewer individual initiatives can be pursued simultaneously than would be possible within a tactical programme.
Figure 3 shows the net effect of savings, hidden costs and additional benefits.
Figure 3
Unless an adjustment factor has been applied to PPV, the cumulative net benefit of the tactical programme will be less than PPV predictions. In extreme
cases the 'savings' may actually be negative. Even in the best case, benefits are unlikely to be sustainable; year-on-year improvements become smaller
and it proves impossible to find savings that do not impact in some way on value creation. The cumulative net benefit from the strategic programme will
exceed PPV predictions. The overall effects are twofold:
1. a much greater relative benefit from the strategic approach and
2. an earlier crossover than the advocates of tactical programmes would have you believe.
A well designed and well run strategic programme will deliver sustainable benefits and a greater ROI than a tactical programme.
So, why can't we have the short term benefits of a tactical programme, then switch to a strategic programme for the long-term benefits? Included in the
collateral damage of the tactical programme is the adverse effect on key supplier relationships of inappropriate adversarial and hard-line behaviour:
loss of trust, co-operation and commitment. Adversarial and hard-line approaches are supported by a strategic programme but, because of the analysis and
strategy development, are directed only to appropriate segments of the portfolio. It is this collateral damage that inhibits the switch from a tactical to
a strategic approach. Once supplier trust, co-operation and commitment have been lost they will be difficult, sometimes impossible, to regain.
In my first article, I drew to conclusion as follows:
"Given that many central procurement organisations are founded on the promise of procurement excellence and dubious procurement 'savings' it is clear
that reliable delivery of improved profitability requires systems thinking - an integrated supply chain approach - rather than typical current practice."
To this I would add that procurement best practice is about maximising added value, not necessarily reducing costs.
Acuity (Consultants) Ltd takes a holistic and strategic approach, engaging all key internal (and, where approproate, external) stakeholders to deliver
added value and to ensure procurement initiatives deliver sustainable bottom-line profit improvement.
Join the discussion, "
Tony Colwell - 30 September 2011
Many large organisations embark on centralised procurement initiatives with the promise of substantial savings, yet direct increases in profitability
fail to materialize within the business units.
Judging by the focus of much literature on procurement practice, few organisations would appear to be aiming let alone achieving much higher than
level 3 of a 5-level Procurement Capability Maturity Model. (This subjective view is not materially inconsistent with findings of
research by Batenburg and Versendaal in the Netherlands in 2008.) To explain briefly, the
inference is that Procurement may practise category management, and aspire to achieve lowest total cost of ownership ("TCO"), but would not be looking
at the implications of external integration (e.g. optimising the extended supply chain) and value chain integration (e.g. increasing business value
derived from spend).
Typically targets are set, and 'signed up to', by the procurement department, then savings are identified at the end of each sourcing process and are
reported as a measure of procurement department success. It is generally recognised that savings are only realized as purchases are made on the contract;
responsibility for the delivery of those savings usually falls with the consumers of goods and services. Procurement may monitor compliance - 'realized
savings' vs 'identified savings' or some measure of the uptake of central contracts - and use this as a stick to beat users to make purchases under the
contract when they might otherwise buy elsewhere.
Low compliance may therefore be seen as a measure of errant users rather than ineffective procurement, yet often it is indicative of underlying problems
either with the procurement or execution of the contract. And even when compliance is high, it still does not necessarily deliver equivalent improvements
in profitability. The reasons are in the way 'savings' are measured and the behaviours the particular measures drive.
Procurement savings are usually measured by purchase price variance ("PPV") for directs, and by similar 'input' measure for indirects. The true costs can
only be measured in terms of outputs, after accounting for consequential (in)efficiencies and waste. For capital items, or consumables involving set-up
or maintenance costs, full lifecycle costing - TCO - is necessary. But even TCO has its limitations, focusing on internal costs, ignoring external
factors and value that may derived from the expenditure.
Operational departments and users may have to suffer the consequences of procurement shortcomings long after the sourcing process is concluded.
Procurement KPIs rarely include appropriate measures of downstream, or lifecycle, performance. This inevitably leads to conflicting pressures on the
various stakeholders. In such circumstances, optimum performance, and profitability, may depend on stakeholder relationships and personal integrity
running in opposition to individuals' performance incentives.
Consider a very simple example. Procurement department sources packaging for a new product launch. Say Procurement performance is measured by PPV
relative to target packaging price for the product group. This drives a minimum specification, low-price, high-discount approach... pile it high, buy
it cheap! The Packaging Technologists are interested in protective properties and pack integrity; Production performance is measured on packing line
speeds and minimum waste. Both drive for higher specifications (at higher prices). The stakeholders are in conflict. By changing the performance measure
from 'cost per unit purchased' to 'cost per unit packed' the three stakeholders are more aligned and working to the same ends. Looking further downstream,
one might also measure 'cost per unit sold' (net of credits for damages).
Given that many central procurement organisations are founded on the promise of procurement excellence and dubious procurement 'savings' it is clear that
reliable delivery of improved profitability requires systems thinking - an integrated supply chain approach - rather than typical current practice.
Acuity (Consultants) Ltd takes a holistic approach, engaging all key internal (and, where approproate, external) stakeholders to deliver added value and to ensure procurement initiatives deliver bottom-line profit improvement.
This article is the first in a series on how to avoid the pitfalls of centralised procurement. Next week I look at strategic vs tactical cost-saving programmes.
Join the discussion, "Why do so many procurement cost saving initiatives fail to deliver to the bottom line?" at Procurement Professionals (#1 supply chain & sourcing group) on LinkedIn
References:
"Maturity Matters: Performance Determinants of the Procurement Function", R Batenburg & J Versendaal, Utrecht University 2008.
Go to top
Tony Colwell - 23 September 2011
In the last week the media have reported huge waste of UK public funds associated with shared services projects. This triggered broader debate
about the value of public sector projects.
Critics frequently refer to the failure to control suppliers of services - the consultancy architects of shared services; technology suppliers;
outsourced services providers - and the hidden legacy of debt from PFI projects.
The problem is not confined to the public sector. In a recent
live discussion
hosted by The Guardian, it was claimed that research in the private sector shows 70% of shared services and mergers fail to deliver to expectations,
and that the problems are not about processes, they relate to people, power and politics.
Cranfield University estimates for many firms, up to 75% of the products and services they provide are sourced from suppliers, suggesting that
relationships between firms are a key source of competitive advantage as opposed to the focus on managing processes and physical assets.
Sustainable competitive advantage requires agreement to operate on terms where neither partner can exploit the other.
Anecdotal evidence suggests that public sector procurement processes and the resultant contracts for services are failing to provide adequate protection.
In my experience, private sector contracts frequently have similar shortcomings. Legal advisors often focus on documenting current requirements -
a kind of snapshot - rather than considering how the requirements and relationships might evolve.
Service agreements need to provide a dynamic framework for controlling the evolving commercial relationship over the contract life cycle.
Otherwise, as requirements and services digress from the original scope and intent, the result will be costly and uncompetitive add-ons, and margin
creep generally in the supplier's favour.
So, here are 3 guiding principles to ensuring enduring competitive service:
1. Procurement must focus on determining, and contracting on the basis of, supplier capability, not on lowest cost or perceived best value
of current, soon-to-be-obsolete solutions. Selection criteria need to take account of suppliers' intrinsic strengths and weaknesses:
(a) infrastructure, resources and technology;
(b) alignment and strategy;
(c) assurance systems and demonstrable ability.
2. Contract in a way that prevents suppliers from exploiting and profiting excessively from changing requirements. Contract provisions
must include
(a) change control procedures to deal with any significant changes - in the business, the requirements, the assets and resources deployed,
the methods of providing the services - and to set the costs or budget for modified services. The procedures must permit customer discretion in
determining the way forward, including the use of third parties if the incumbent supplier is uncompetitive.
(b) supplier obligation not unreasonably to refuse to perform similar services to protect against 'cherry picking' or attempts to frustrate
the development of services;
(c) benchmarking to establish continuing competitiveness, both in terms of cost and good practice. The intention is to protect against
- divergence in customer's requirement and supplier's capability
- drift caused by cumulative effect of small changes
- uncompetitive pricing for changes.
(d) termination provisions on grounds of service and cost – in whole or in part, to allow the separation of services for which the
supplier is no longer suitable.
3. Manage supplier performance. A service level agreement should include a formal, documented process comprising:
(a) responsibilities matrix;
(b) key performance measures and reporting cycles;
(c) incentives to balance cost and service;
(d) contractual cost targets at contract start, as modified under change control and benchmarking;
(e) contractual service levels reflecting industry good practice, as modified by change control and benchmarking.
If your chosen supplier is reluctant to co-operate in any of the above, you have to ask, "Have I found the best supplier?" If customer and supplier
are confident that the supplier is the best placed to provide the service, then reaching agreement in these areas should be possible.
Discussion at Procurement in UK Public Sector Group on LinkedIn
Tony Colwell - 16 September 2011
After the lull of the holiday season the Interim Management community has shown renewed interest in subject of "Catch 22" - the Cabinet Office's
constraints on public sector deployment of Interim Managers. A discussion thread has restarted in the
Odgers Interim Management Group on LinkedIn.
The discussion had turned negative and a new direction, leading to some positive action, was called for. Because this is a closed Group,
I thought it would be appropriate to reproduce my comment, which (with minor editing) was as follows.
This [Odgers Interim Management] discussion thread started on 3rd June. Alf Oldman and I had a meeting with the Cabinet Office on 1 July at which we
were informed of plans to introduce new framework agreements to cover consultancy and executive interim requirements. We were not bound by non-disclosure
agreement; it is more out of regard for our professional integrity that we have not broadcast plans that the Cabinet Office has chosen not to announce
formally. It might be helpful, to take the debate forward in a constructive manner, to disclose some of what we know.
The meeting dispelled a few myths surrounding "Catch 22".
The Cabinet Office constraints on the use of 'consultants' applied to Central Government only. The use of consultants and interims by local authorities
has been affected by budgetary constraints, not (as far as I am aware) by Central Government directive.
William Jordan, former head of OGC, mandated that Central Government departments choose from 3 pre-existing models:
1. DWP Cipher - the outsourced Capita supply model;
2. Internal Buying Hub (CIX)/Home Office portal to Buying Solutions' frameworks.
3. ANY OTHER OPTION OFFERING EQUIVALENT VALUE.
The mandate required that any exceptions valued at more than £20k (but less than the £100k threshold requirement for tendering via OJEU) be supported
by a business case approved by the department head, and the Cabinet Office notified. I am not clear it was mandated that the Cabinet Office would have
to approve such business cases. Besides, the freedom to use "any other option" gives enormous scope, especially in light of the
Public Accounts Committee's findings that the
Cabinet Office is incapable of assessing value.
Cabinet Office (and formerly Buying Solutions') frameworks - of which there are currently 19 active - have never been mandated, and neither will they be.
That the Cabinet Office should be seen to prevent Central Government departments, or local authorities, from discharging their responsibilities is
clearly unwise both politically and in terms of maintaining managerial accountability.
The proposed new frameworks are to fall within two distinct categories: (1) contingent labour; (2) consultancy, INCLUDING EXECUTIVE INTERIM.
Executive interim will not be classified as contingent labour, but 'handle-turning' contractors' roles will be. I feel it is inappropriate to comment
on the dividing line in terms of day rates but it was clear to me that many existing public sector 'interims' will fall into the contingent labour
category, including those working at rates above recognised as lower-limit thresholds by the two professional bodies, API and IIM. This is to be welcomed.
If the Cabinet Office delivers what Alf and I were told is planned, then the recognition of executive interim status and the crossover with,
and alternative to, big consultancy will be addressed.
My focus since the meeting has been on the interim management supply model. The success of any new frameworks is entirely dependent on the outcome of
the tendering process. The critical factors are (a) Cabinet Office recognition that best value does not equate to lowest Interim Service Provider's ("ISP") margin, and
(b) ISP's placing bids that demonstrate, can deliver, and can measure the added value of a higher-margin service.
The Cabinet Office is fully aware of the need to evaluate different interim management supply models. To this end Alf and I produced a second White Paper
which we have not published (in the public domain). Much of the content regarding measuring the effectiveness of interim management supply models has
been put to the IM community for discussion, both before and after we submitted the White Paper to the Cabinet Office. Details can be found in
my earlier blog.
I also started discussions in the most active ISP's own Groups - including a discussion at Odgers Interim LI Group -
to ensure that ISPs as well as the broader Interim community were aware of the need to develop innovative models . Disappointingly, these attracted
only moderate interest and little comment from the ISPs themselves.
Alf and I know from private discussions we had with various ISPs that more is going on behind the scenes than is apparent in the public domain.
I would expect some reticence to discuss publically what ISPs might be doing to establish their own positions and place their bids. The future of
the executive interim opportunity in Central Government departments is at stake. So perhaps this discussion should be redirected towards ensuring
that ISPs provide the type of interim supply model that we executive interims would wish.
Non-members of the Odgers Interim Management Group can join the discussion
"Effectiveness of Interim Management Supply Models – Where Next?" at API (open) Group on LinkedIn
Tony Colwell - 19 August 2011
Stakeholder engagement is a critical factor in the success of business change, especially business transformations, which may require significant cultural change.
Business transformation typically involves people, process and systems changes which need to be delivered in order to produce a step change within the business.
The design of effective processes and application of appropriate technology is not enough to ensure success. Insufficient acceptance and adoption of the new processes,
arising from inadequate engagement of stakeholders, is a common cause of transformation failures.
The same is true for public sector transformation, whether internally within public and civil organisations or in pursuit of broader civil and social reforms.
Much of the published literature on stakeholder engagement deals with the introduction of sustainable engagement programmes in public,
private and civil society organisations - with strong emphasis on accountability, particularly democratic accountability - and is applicable
to the integration of stakeholder engagement with corporate governance, strategy and operations. Readers who are interested in this context
might consult The AA1000 Stakeholder Engagement Standard.
This article is directed at the tactical application of stakeholder engagement within a specific project or programme - a pragmatic approach
to getting stakeholders on board, and ensuring the desired outcomes are achieved.
The overall aim of the engagement process is to achieve the desired outcomes. The desired outcomes should, therefore, always be at the forefront of planning an engagement process.
They need to be clearly stated - setting out exactly what is sought from the proposed changes in process, technology, etc.
The delivery of the technology, the process and the process outputs themselves are not the main focus, which must be on the achievement of the outcomes.
This enables some latitude in determining how the outcomes are achieved - what technology, process and process outputs are used -
so that stakeholders have a sense of purpose.
To engage stakeholders fully there are 7 areas we address. It is important to note that these are not sequential steps,
although the emphasis moves, with the passage of time, from the lower to the higher-numbered items in the following list :
1. Sponsorship: Ensuring sponsorship for the change - in business, at a senior executive level from both internal
‘supplier’ and ‘customer’ perspectives - in public life, from institutional heads representing providers and receivers of services. Often,
work needs to be done in advance to define the scope and context of the engagement in order to gain commitment to the engagement programme.
2. Involvement: Involving the right people in the design and implementation of changes, to make sure the right changes are made
- so ensuring their effectiveness. Also that no stakeholder group is inadvertently or intentionally excluded - so ensuring legitimacy.
And, at the outset, involving the right people in the design of the engagement plan itself.
Seek active participation. Consultation is good but programmes where the delliverables are 'done to' or 'done for' the stakeholders are
less likely to lead to successful outcome than if they are (in part) 'done by' stakeholders.
3. Impact: Assessing and addressing how the changes will affect people. 'Sweeping issues under the carpet' is a
frequent cause of failure, yet often the issues present an opportunity to increase stakeholder engagement, by getting them to participate in
finding or developing solutions.
4. Communication: Telling everyone who's affected about the changes... and listening. Early communication the context
in which the stakeholder engagement is taking place is important: - for sponsors, a common understanding of context and purpose ensures consistent
leadership; - for other stakeholders to align participants, clarify their roles, and ensure the process is responsive to their needs.
5. Readiness: Getting people ready for the changes, by ensuring they have the right information, training and help.
The timing and resources required are often underestimated but the requirements can be reduced by the planned involvement of key stakeholders.
6. Responsibilities: Ensuring people understand and accept their responsibilities, and are held accountable.
Unambiguous definition of participants' roles is a pre-requisite.
7. Compliance: Addressing resistance; in most cases revisiting 1-6 above, but occasionally requiring the removal of
negative influences. Former US Secretary of State, Colin Powell said "The good followers know who the bad followers are, and they are waiting
for you to do something about it." I agree. However, the necessity to remove a significant number of negative people usually indicates a
failure in design, planning or management. Mass removal of protesters, and their replacement by sycophants, is a recipe for disaster.
This is not an exclusive list. Additional political and organisational issues will need attention, depending on the nature of the changes.
I opened by saying that stakeholder engagement is a critical factor in the success of business change. It seems to have become
fashionable to put stakeholder engagement at the pinnacle of the business change agenda - suggesting that change management is purely about
stakeholder engagement - as if changing the organisation and improving stakeholder engagement will somehow transform the business.
Real business change is not achieved by changing the organisation structure. Effective process is a pre-requisite.
W. Edwards Deming said "If you can't describe what you are doing as a process, you don't know what you are doing" (engaged or not).
Stakeholder engagement helps the design of good processes, ensures their effective operation, and encourages personal commitments to
deliver desired outcomes.
Further reading:
Tony Colwell - 11 July 2011
Following on from my last blog, “Effectiveness of Interim Supply Models – The Metrics?”
and a recent invitation to apply for an interim assignment with a not-for-profit organisation, I want to explore the valuation of consultancy and interim assignment outputs.
The link between my blog and the invitation is the critical significance of the brief or Statement of Requirements (“SoR”).
I have concerns over the absence of references to desired outcomes. My concerns are not specific to public and not-for-profit sectors so, hopefully,
my comments will be of interest also to readers from the private sector.
“The Effectiveness of Interim Supply Models” followed a visit to the Cabinet Office with my colleague, Dr Alf Oldman,
and numerous conversations we had with fellow interims and interim service providers, and is a precursor to our joint submission to the Cabinet Office.
The invitation to the Cabinet Office had come indirectly from the Rt. Hon. Francis Maude, Minister for the Cabinet Office & Paymaster General, following receipt of
Dr Oldman’s Catch 22 White Paper.
Francis Maude replied,
“To ensure value is both improved and sustained, work is currently underway to develop a new strategy to centralize and
simplify how Departments buy common types of consultancy and contingent labour.”
Alf Oldman gives his account of the meeting and in his latest blog considers “
Reforming the Professional Interim and Independent Consultant Supply Chain Model?”
I shall pursue a particular perspective, relative to my focus on supply chain management: measuring the delivery.
But, first, it is necessary to explain the context of the meeting, which I shall do by reproducing two paragraphs from Alf Oldman’s blog,
in which Alf refers to the House of Commons Committee of Public Accounts report entitled
“Central government’s use of consultants and interims”
(“the PAC report”):
“Francis Maude kindly forwarded a copy of my White Paper to the appropriate team at the Cabinet Office and invited me to speak with the official leading the team and
this resulted in a very successful meeting last Friday. I was accompanied by Tony Colwell who is a Supply Chain expert.
“I met with Tony ahead of our visit to the Cabinet Office and kicked around our views of the professional interim supply model.
This resulted in the schematic entitled the “Professional Interim Community“
which we used as a discussion aid at the Cabinet Office – this contains five archetype models of intermediary.
The meeting went very well and we had a good exchange of views and were able to empathize with each others’ perspectives.
In passing, the PAC report was mentioned as evidence confirming both the importance and dependence of Central Government on consultants and interims
for the foreseeable future. I strongly encourage the reader to take some time and read the PAC report carefully, in particular the evidence provided by
Sir Gus O’Donnell (Cabinet Secretary and Head of the Home Civil Service) and Ian Watmore (Chief Operating Officer, Efficiency Reform Group, Cabinet Office).”
Using the terms “consultants” and “consultancy” to cover both consultants and interims, the PAC report states:
“Departments frequently fail to adequately define the service required or negotiate the most advantageous contractual terms,
and therefore cannot assess the performance of consultants or whether the work done was of benefit.”
“The Cabinet Office stated that it is difficult to measure the value achieved by consultancy because government can currently only measure the value of
the inputs and not the outputs”
In giving evidence to the Public Accounts Committee, Sir Gus O’Donnell (Cabinet Secretary and Head of the Home Civil Service) said,
“Look, if you could tell me how to value the outputs that would be fantastic.”
How to measure and value the outputs? That’s my territory!
Overall, there are three critical measures of the effectiveness, and value, of the Interim Supply Model:
1. The total cost of procurement (internal and external)
2. The net benefits receivable from the interim’s intervention
3. The composite risk of the intervention
Focusing on the second point, the benefits are in delivered outcomes, not in the activities that are performed. So establishing the desired outcomes is really important.
It may be difficult in the case of general contractors (or contingent labour) to resolve, from the desired outcomes of a broader programme, the contributions of individual
contractors within the programme team. Consultancy and Professional Interim (“PI”) engagements, however, should be supported by a client business case which
summarizes the key outputs, including value creation, that are specific to that particular engagement. Where it is not possible to translate the PI’s benefit case into
direct financial measures of outputs, I would expect other clearly defined measured outputs – these outputs should be tracked through the life cycle to demonstrate
value added and be available to audit. OGSM methodology (Objective, Goals, Strategies and Measures) provides a simple but powerful framework. The assignment objectives are
the desired outcomes.
So why do so many interim assignment briefs focus on the responsibilities of the role and activities that the client wants the interim to perform rather
than the outcomes to be achieved? Surely this must reflect a failure in the collaboration of client and intermediary?
The interim’s terms of reference (“ToR”) would normally be derived from the SoR or, after collaboration between client and intermediary,
the assignment brief. The interim’s intervention, however, often results in a change in the ToR reflecting deficiencies in the earlier analysis of requirements.
The other early deliverable in the PI’s assignment is a plan which defines the deliverables necessary to achieve the desired outcomes. Critically, it is the
Professional Interim’s intervention, and expert knowledge, that will challenge the perceived requirements (and perhaps modify the objectives) and determine the
activities and deliverables necessary to deliver the desired outcomes.
The Objectives, the interim’s Plan, the planned Deliverables, changes between SoR and final ToR, and the Outcomes, are essential elements of the proposed measures
for interim supply model evaluation. For each supply model, the value of the consultants’ or PIs’ interventions can be assessed in four qualitative measures:
Delivery of outcomes: % Outcomes not meeting Objectives
Quality of deliverables: % Deliverables not meeting Plan quality
Timing of deliverables: % Deliverables not meeting Plan timing
Quality of specification: Changes, % ToR
Uniform and standardized quantitative measures can be developed for assignment outputs, for example: by expressing (as a percentage) within each assignment, the extent to which:
- the Objectives have been met by the Outcomes
- the Deliverables have met Plan quality.
These measures need to be recorded and formally signed off: the Deliverables by client, intermediary and interim at a final pre-closure assignment review; the Outcomes
by client and intermediary (the interim having since departed, though many Professional Interims would be keen to return to participate) in a post-closure audit.
Talking to former colleagues in the public sector, who procure substantial numbers of specialist technical advisors and subject matter experts, it became clear that the
existing framework agreements for consultancy and contingent labour do not meet their specialist needs. It would seem that clients, interims and the Cabinet Office have
a shared interest in connecting demand and supply, and developing an effective evaluation of the various supply models and effective evaluations of individual assignments.
References:
House of Commons Committee of Public Accounts report entitled “Central government’s use of consultants and interims” dated 14 December 2010
“Utilising Professional Interims to Help Reduce the Budget Deficit - Removing Catch 22” by Dr Alf Oldman
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Tony Colwell - 02 July 2011
Following on from our campaign to differentiate Professional Interims from Consultants and Contingent Workers, and the removal of "Catch 22" (see References),
Dr Alf Oldman and I will be asking, “What should the ideal Professional Interim supply model(s) look like?”
First, one needs to measure the effectiveness of established Interim Management supply models. So, what are the most important subjective and objective metrics
for evaluating the effectiveness of supply models over the interim assignment life cycle?
For example, supply models might include intermediaries (e.g. managed service providers, recruiters, search-based providers, specialist providers and one-man bands)
collaborative networks and direct. If the various stakeholders are to operate a model it needs to be effective, and the effectiveness examined, from the perspectives
of each of the key stakeholders, i.e. clients, intermediaries and interims.
Alf and I have drafted a strawman to be tested by the Interim community, which comprises a life cycle model (Figure 1) and sets of subjective and objective metrics.
(Note – the model includes intermediary. In the case of direct or collaborative supply models the role of the intermediary is split between the client and the interim
or collaborators. It is our contention that, substantially, the same metrics will apply.)
Figure 1.
Objective Metrics
Assignment Quality
Deliverables quality %
Deliverables not meeting Plan quality
Formal Contract Closure % Assignments not Reviewed/Closed
Overall assignment delivery %
Outcomes not meeting Objectives
Audit %
Assignments not audited
Procurement Quality
Effectiveness of screening Number of Submissions per Award
Candidate rejections by
client %
Submissions rejected
Security & Reference
failures %
Awards failing security/reference checks
Post-award performance
failure % Contracts terminated early
Requirements definition % SoR inconsistent with ToR
Requirements interpretation % Briefs inconsistent with ToR
Depth of Intermediary’s talent pool Number of (potential)
Submissions per Invitation
Application success rate Number of Awards per Application
Interview success rate Number of Awards per
Interview
Assignment Timing
Deliverables late %
Deliverables not meeting Plan timing
Procurement Timing
Overall procurement timing SoR
to Interim Start /days
Sourcing response time SoR to first Submission
Award /days
Speed of selection First Submission to Award /days
Submission screening time First Submission to Short List /days
Interview and decision
turnaround Short List to
Award /days
Contract turnaraound Award to Contract /days
Security Clearance
turnaround Award to Clearance
/days
Interim payment terms
Interim payments average days
late
% Interim payments overdue
% Interim fees in dispute
Costs over Assignment
Internal cost Client in-house costs per Award
Client in-house cost/period %
Interim fees per period (a)
External spend Intermediary charges per Award
Intermediary’s margin % day rate
(b)
Total cost to Client External + Internal cost per
Award
Engagement cost % Interim fees,
i.e. (a)+(b)
Costs for Procurement
Meaningful comparison would
require that intermediary fees are 2-part, i.e. a procurement fee (e.g. finder's fee, etc)
and a management and administration day rate. This would also enable mirroring of Intermediaries
costs. If that were the case then the “Cost Over Assignment” measures would be replicated for the procurement fee element.
Subjective Metrics
A subjective measure of Interim Management Supply Models might be performed by a survey of key stakeholders:
SURVEY OF PROFESSIONAL INTERIM & INDEPENDENT CONSULTANT (PI) EFFECTIVENESS
This survey looks at three perspectives: client; intermediary; and professional interim/independent consultant (PI).
1. I am answering this survey as (please tick one of the following)
a. Client
b. Intermediary
c. PI
Please answer all following questions by scoring 1- 5, with one being strongly disagree and five being strongly agree
2. The intermediary provides considerable value-added in terms of external context in terms of clarifying the statement of requirements and in defining the PI brief
3. The intermediary provides a list of potential PIs quickly, i.e. within two to three days
4. The intermediary effectively screens CVs and only presents well matched CVs in the list
5. The intermediary effectively checks security and references
6. The intermediary provides specialized value-added services, like personality tests
7. The intermediary provides good value for money
8. The intermediary’s pricing structure is transparent
9. The intermediary should price separately finder’s fee, ongoing administration for the PI and value added services
10. The intermediary’s timesheet process is efficient and generates minimal errors, i.e. 99%+ first time processing
11. The intermediary pays the interim quickly and efficiently, within a week of receipt of timesheet and 99%+ first time processing without queries
12. The intermediary has invested in web based processing systems that help the client, the intermediary and the PI
13. The intermediary adds value in terms of reviewing and improving the initial terms of reference for the PI
14. The intermediary has a transparent and well drafted contract that generates very few queries
15. The intermediary provides value-added during the PI assignment and physically participates in mid-term reviews
16. The intermediary provides value-added in terms of resolving disputes or differences between the client and the PI
17. The intermediary provides added value in the final review between the client and the PI at the end of the assignment
18. The intermediary conducts an audit or review of the assignment is completed of the whole life cycle, looking for suggestions for improvement with participation of both the client and the interim
19. Overall deploying PIs provides effective value for money compared to branded consulting firms
Note: To avoid any confusion, I would add that we are not seeking responses to the survey but we shall appreciate comments - ideally additional/alternative specific metrics - as to how the effectiveness of Interim Management Supply Models can be measured.
Please join the discussion
"Effectiveness of Interim Management Supply Models – The Metrics?" at API (open) Group on LinkedIn
Tony Colwell - 17 June 2011
My attention recently has been directed at public sector reform and the potential challenges the UK faces if budget cuts lead to weakening of central government departments
and local authorities before effective transformations can be designed and implemented.
Having previously recovered a failing transformation programme, run by insufficiently skilled public sector managers,
I can foresee the danger of similar failures occurring on a large scale, with serious implications for the delivery of public services.
In my opinion – shared by many Professional Interims with deep experience of running transformation programmes – external resource will be necessary.
The public sector does not have sufficient expertise, in breadth, depth and numbers, to have even a moderate hope of success.
Moving away from the public sector, the same shortfall in capability applies to many private sector organizations embarking on major business change programmes.
This is particularly true of those that do not have a business process management focus.
What do I mean by “business process management focus?” It is probably easier first to explain the converse, traditional approach, which is as follows.
As our demands and expectations have grown, in order to meet them, organizations (private and public) must adapt.
Most businesses do this organically, by splitting the business into departments with specific functions (marketing, sales, procurement, HR, etc.)
each building their capability and honing their skills.
The result is a series of silos of functional expertise. The role of managing the business processes – i.e. cross-functional processes as opposed to intra-department sub-processes –
often falls by default to the IT department, which in itself has been constructed as a silo of technical excellence and is often lacking in broader business experience.
The greater the rate of change, the more this traditional approach struggles to keep up; the greater the ineffectiveness and inefficiency from having a less-than-joined-up approach.
There is a growing body of opinion that the entire systems of management need to be reinvented. (See Gary Hamel's video at MIX.)
But I am, for the time being, going to stick to a less radical approach.
Business Realities
In business, increasingly, your success depends on your ability to read and respond to changes taking place in the market:
• on understanding the impact of these changes on customers and suppliers, and positioning your business appropriately;
• on your ability to differentiate between core and non-core activities, and recognizing opportunities to use third parties;
• on having effective and efficient business processes.
Focus on excellence within business functions is not enough; each area needs to be part of the bigger picture. At Acuity (Consultants) Ltd we are great believers in improving the co-operation of functions and departments within a business, and collaboration with trading partners.
The Business Process Perspective
By overlaying a business process perspective we can
• eliminate sub-optimization (practices may be optimized for one department but create extra burden or work for another),
• focus on value adding activities – those that are important to the customer and to the company strategy – eliminating non-value tasks and activities.
The main impact is getting business agility: good business process management enhances flexibility and is an enabler for business innovations.
The approach can be revolutionary or evolutionary, depending on business circumstances and ability to cope with yet another initiative.
But this is one initiative where we expect a rapid payback in terms of management time.
What might such an initiative entail?
• Transcending (leading to breaking down of) the "silo" mentality of an organisation
• Understanding the value chain(s) and each function’s role in adding value.
• Defining metrics and targets relative to what is important to the customer; truly measuring business performance against the customer expectations.
• At one extreme, potentially a new approach to managing day-to-day operations and business change.
• At the other extreme, small but worthwhile improvements in performance by aligning departmental goals and objectives…
potentially as part of a larger continuous improvement programme.
Inspired by Gary Hamel's video, I thought, before commenting on revolutionary or evolutionary strategies, I might seek some input from the Business Process Management community by starting a discussion on LinkedIn:
"Business process management – a complete organisational redesign, or an extension of the IT department?"
I am interested in current experiences of large organizations that have broken the mould – moved away from the traditional functional silo – and are operating successfully in a different way.
At this stage I have not decided how Part 2 will develop. Let's wait and see if we can gain further insight to alternative models that businesses are operating.
References:
“Reinventing the Technology of Human Accomplishment” Gary Hamel at The Management Innovation eXchange (MIX).
MIX is an open innovation project aimed at reinventing management for the 21st century.
Join the discussion
"Business process management – a complete organisational redesign, or an extension of the IT department?" at the Business Process Management Professionals (open) Group on LinkedIn.
Tony Colwell - 10 June 2011
This week, amongst the many tweets I read, there were several I retweeted, on quite different subjects, that seemed relevant to a central matter of interest:
how do we mobilize the Professional Interim community to help the Government to reduce the budget deficit?
This matter may not be of interest to all readers, but stay with me... this blog is about Change Management.
Keeping briefly with our matter of interest, the key issues are cynicism within the Interim community that the Government can be influenced, arrogance within Government, and conservatism within the Civil Service.
Precisely what I mean by ‘arrogance’ and ‘conservatism’, I will explain, but the theme of this week’s blog derives from the contention that these are recognized attitudes
of stakeholders in any change programme… obstacles to the success of the programme… obstacles that need to be overcome.
My retweets pointed to the obstacles themselves, and to aspects of leadership, stakeholder engagement and effective teamwork that form essential considerations in managing change.
The first was a link to a video post, “Rich Dad, Poor Dad”, by Robert Kiyosaki in Supply Chain Today.
In his book, Robert Kiyosaki writes about overcoming five obstacles to achieving wealth… which are obstacles to success in many other contexts:
Fear – fear of losing (in this case money, but in other circumstances it could be job, status, power, influence, respect…)
Cynicism – unwillingness to open the mind to new possibilities, and excessive conservatism; the cynicism of others adds to support for our own internal arguments for not taking action (mostly driven by fear).
Laziness – busy people are often lazy; they create work in order to keep or be seen to be busy; they engage in displacement activities rather than focusing on what is important.
Bad habits – continuing ineffective or inefficient ways because “That’s the way we have always done it,”
or “We’ve tried that before [actually referring to something different] and it doesn’t work.”
Arrogance – ego plus ignorance: the “If I don’t know it, it can’t be important” attitude, often used to mask ignorance.
The book does not deal directly with conservatism. Conservatism is founded in a combination of any or all of the above, but additionally may have political or power-seeking motives
(for example, ‘empire building’: a desire to increase a Department’s scope and budget rather than delivering reform and making savings.)
Overcoming these obstacles requires strong leadership, which brings me to the second article “5 Deadly Leadership Drains” by Terry R Bacon in Bloomsberg Businessweek:
The five power elements of leadership, and how they can be drained, are as follows:
Knowledge – Not knowing is okay; pretending you know,and then getting caught out, drains your power.
Expressiveness – Eloquence in speaking increases a leader’s influence; talk too much (and listen too little) then your influence and power will be diminished.
Attraction – The ability to draw people to you, e.g. through warmth, wisdom, shared experiences; diminishes if you are aloof, arrogant, or self-absorbed.
Reputation – How you are perceived in your various communities enhances all of a leader's other power sources; damaged if you cause grievance but refuse to take responsibility for it.
Willpower - A meta-source of power, the desire to be powerful coupled with the courage to act. Willpower drains if leaders become afraid of moving forward,
or do not have resilience; fear of failure is a huge willpower usurper.
The strong leader must engage stakeholders and establish effective teamwork. In the approach developed by Acuity (Consultants) Ltd, to engage stakeholders we address 7 areas:
Sponsorship: Ensuring sponsorship for the change at a senior executive level from both internal ‘supplier’ and ‘customer’ perspectives.
Involvement: Involving the right people in the design and implementation of changes, to make sure the right changes are made.
Impact: Assessing and addressing how the changes will affect people.
Communication: Telling everyone who is affected about the changes... and listening.
Readiness: Getting people ready for the changes, by ensuring they have the right information, training and help.
Responsibilities: Ensuring people understand and accept their responsibilities, and are held accountable.
Compliance: Addressing resistance; in most cases revisiting 1-6 above, but occasionally requiring the removal of negative influences.
But effective teamwork requires more than just engaging stakeholders, important though that is.
In the third article, “Six Common Misperceptions about Teamwork” by J. Richard Hackman in Harvard Business Review,
Richard Hackman writes that his research shows there are a number of mistaken beliefs about effective teamwork:
Misperception #1: Harmony helps
Research shows that well managed conflict, as long as it is about the work itself, can be good for a team.
Misperception #2: It's good to mix it up [new members, new ideas]
The longer members stay together as an intact group, the better they do. The research evidence is unambiguous.
Misperception #3: Bigger is better
Excessive size is one of the most common - and also one of the worst - impediments to effective collaboration. Small teams are more efficient, and far less frustrating.
Misperception #4: Face-to-face interaction is passé
Despite technology, teams working remotely are at a considerable disadvantage. Periodically bring team members together; there really are benefits to sizing up your teammates face-to-face.
Misperception #5: It all depends on the leader
The hands-on activities of group leaders make a difference but the most powerful thing a leader can do is to create conditions that help members competently manage themselves.
Misperception #6: Teamwork is magical… all one has to do is gather up some really talented people and tell them in general terms what is needed.
[Does this sound familiar? How often do we see organisations changed and the lower levels just left to put together the pieces!]
On the contrary, success requires careful thought and preparation. The best leaders state clearly what the team is to accomplish, make sure adequate resources are provided,
and continue to support the team through to delivery [as reflected in our approach to stakeholder engagement].
The final tweet concerned (amongst other things) the use of consultants in change programmes.
Tony Colwell - 01 June 2011
Fellow Professional Interims may be interested in the content of a letter from the Cabinet Office which appears to lump us in the category “contingent labour”.
This has prompted me to start a discussion on LinkedIn, "
Professional Interims: consultants or contingent labour?" to gather ideas as to what we might do about this apparent lack of appreciation of the existence and value of Professional Interims.
To put the letter in context, it is the Cabinet Office response to a meeting I had with my constituency MP on the subject of using Professional Interims to help reduce the budget deficit.
This was part of an initiative, in which I and a number of fellow Professional Interims participated, arising from a discussion in the LinkedIn IIM Group initiated by
Dr Alf Oldman on
"The Return of Catch 22: Interim Managers caught up in Coalition Government's Catch 22."
Extract from a letter from the Rt Hon Francis Maude MP, Minister for the Cabinet Office and Paymaster General, to James Gray MP, dated 24 May 2011:
Thank you for your letter of 26 April… bringing to our attention the paper on “Utilising Professional Interims to Help Reduce the Budget Deficit”.
I would like to reassure you… that the controls introduced to reduce spend on consultancy and contingent labour, which includes interim personnel,
do allow Central Government to engage external resources but only when absolutely necessary and where it will add the greatest value.
To reduce the deficit we clearly need to make significant savings and, where possible, cut costs at the centre of Government, not on the front line.
The controls currently in place are designed to achieve this quickly.
We explained… we do make a clear distinction between consultants and contingent labour to ensure that,
when there is an operational necessity to engage external resource, the most suitable type is contracted to deliver the best value for money.
These measures are supported by clear guidance and best practice toolkits for Central Departments to ensure that where temporary resourcing spend is approved,
that it adds value, and the type of resource required is carefully considered and appropriate for the task.
Before bringing in external resources, it is this Government’s aim is [sic] to use civil servants wherever possible and, by so doing,
expand their experience and skills. Where external resource is necessary, we ensure that knowledge and skills of the resource are transferred to improve the overall capability of the Civil Service.
To ensure value is both improved and sustained, work is currently underway to develop a new strategy to centralise and simplify how Departments buy common types of consultancy and contingent labour.
This centralised sourcing strategy will make it easier for suppliers, including SMEs, to bid for and win Government work.
We are working with the industry and its representative bodies to secure long term, sustainable change in how Departments procure consultants and contingent labour in order to extract maximum value from the relationship.
Francis Maude
My experience of the Public Sector, limited though it is, contradicts many of the assertions within the letter, on the effectiveness of guidance and toolkits,
engagement of most suitable resource, on knowledge and skills transfer, and on ensuring that temporary resources add value.
I am also be interested to know, what is “the industry” and who are “the representatives” that the Cabinet Office is working with to develop the new strategy?
Hopefully I’ll find out in due course...
But most of all, I found it disappointing and something of an insult to be labeled as “contingent labour”.
This prompted me to start the discussion on this point, hopefully to develop some ideas on how we further our objective of educating both public and private sectors on the existence and value of Professional Interims.
Join the discussion in the
API (open) Group on LinkedIn.
Tony Colwell - 27 May 2011
This is the second part of a two-part blog addressing a key question in managing inbound supply chains.
How do you ensure your demand forecast is fit for financial forecasting and running the supply chain?
It is commonplace for businesses to put great importance on their forecasts.
And, at the insistence of the Finance Department, businesses often operate with a single demand forecast on which the financial forecasts and other forecasts (e.g., labour and materials requirements) are based.
After all, how else will the actions of the various departments be aligned? But of one thing we can be sure, the forecast will be wrong.
Over the years, I have witnessed many debates over the accuracy of forecasts and whether the numbers should be higher or lower.
Marketing and Sales departments are often optimistic, accountants want to be prudent, manufacturing and procurement are torn between the risk of a shortfall in supply and the threat of unwanted product.
The protagonists are usually missing the point. Higher or lower, the numbers will still be wrong.
The key question is, “What is the likelihood of actual demand being higher or lower, and by how much?”
Without examining the probability that demand will fall within a range of values, how is the organisation going to plan to deliver against actual demand and, at the same time, have an effective means of avoiding waste and redundancy?
In last week’s blog (Part 1) I commented on the sorts of information that are usually available but not used in the forecast...
and on the general considerations in meeting the upside and downside.
This week, I cover how this information can be brought together to create a coherent control process focusing on the elements most at risk.
The objective is to ensure the right materials are in the right place at the right time, with no shortages, and minimal stock redundancy.
Last week I took a particular example from food manufacturing and retailing, which I will use again. The example could easily apply to many fast moving consumer goods (‘fmcg’), and more widely to other products.
The immediacy of demand for fmcg presents a series of challenges. The particular problem with fmcg is the short forecast horizon in relation to the procurement cycle.
Attempts to operate lean supply chains by demand-pull techniques may fail through inability to adjust quickly enough to uplifts in product demand.
The scale of, and relationships between trading partners – resulting in lack of leverage for example - may also constrain options for control.
Even where it is commercially possible, transferring liability up the supply chain, will not necessarily reduce risk.
A combination of push and pull can be more effective. ‘Demand push’ ensures availability for call off. ‘Demand pull’ controls the delivery to point of consumption - in this case production, but it could be customer.
A stock buffer at the pull-push boundary (the point in the supply chain where pull takes over from push) needs to be of a size that allows for the responsiveness of the push process to cope with any fluctuations in demand pull.
(The Practice of Supply Chain Management explains the push-pull strategy - expounded earlier by
Chopra & Meindl – but reflects limited understanding of modern food/fmcg retailing.)
Conventional push-pull strategy takes advantage of the aggregation of demand, which usually allows greater forecast accuracy.
Components are procured according to forecast demand for all products (‘SKU’s’) within a product group; then SKUs are assembled according to actual customer demand.
While this approach may provide a more accurate forecast for materials that are common to all SKUs within the product group, it fails to deal with the requirements for unique components.
My focus is on the collaborative management of unique components, and ones with limited application, against the backdrop of uncertainty in demand.
In particular we want to control stock both in the buffer and upstream of the push-pull boundary… and thereby minimize exposure to shortages and stock redundancy.
In my food manufacturing example, our aim was to deliver improved materials availability for production and to improve service (both manufactured and outsourced products) to retail customers.
In this case, control systems for generic materials were unsuitable for special (limited-application) materials and highly specific or bespoke items, for example, consumer packaging.
(Note - for simplicity, I shall use the term ‘materials’ as a non-specific reference to materials, components, ingredients and packaging.)
Demand forecast inaccuracy was identified as an issue, and the principle of developing an “at-risk” assessment was accepted by the team working on the commercial forecasting process.
Our approach was to create a composite forecast from different demand streams (as is common practice in fmcg), then use a combination of push and pull.
In this case, the push is adjusted according to forecast scenarios reflecting upside and downside, and therefore reflecting the degree of uncertainty in the demand.
This is very different from the traditional demand-push approach driven by a single forecast.
The outcome is visibility of the need and extent to which (a) the material supply must be turned down, and (b) the ability to turn supply up must be increased.
Thus the approach is not simply a logistical matter. Importantly, it encourages and facilitates a shift in commercial focus… to providing the mechanism for adjusting supply
(between upside and downside limits) at lowest overall cost.
So let’s look at this example in more detail.
By taking key outputs from new product development (‘NPD’), existing product development (‘EPD’), offers and promotions (‘Events’),
product delisting (both internally and by customers), and commercial forecasting processes, we can improve the materials supply process.
In my example, materials planning needed to take account of volume and variability of product demand, and operate different order/re-order policies for packaging and special ingredients where finished goods (‘FG’) demand was at risk.
To do this we needed to provide certain inputs to the materials order/re-order process:
• calculated value for the percentage of FG demand, by SKU by week, which is at risk;
• downside volume on base forecast; upside/downside on NPD, EPD and Events;
• a composite forecast to cover an appropriate time horizon, in this case 16 weeks.
All SKU’s were assigned to a risk category (high/medium/low) to drive the material supply process. The inputs were
• a monthly review by Account Managers to identify at-risk SKU’s by customer account.
• weekly/by exception at-risk-SKU updates, e.g. any SKU addition/deletion/delist.
• weekly/by exception update of Event status and any shortfalls against planned listings. For example, a promotion may be confirmed but will only take place in 4 stores compared to the 20 expected.
These inputs enabled a weekly calculation, by SKU, of percentage volume at risk (see Part 1, Figure 1).
The calculation takes account of actual and forecast deliveries relative to hurdle rates, and is compiled from base volume forecast, and Event volumes, by Account.
SKUs are automatically assigned to a risk category (high/medium/low). A high-level schematic of the process is in Figure 2.
Figure 2 – Materials Control Process
The required data extracts were possible from existing systems with minimal new/modified inputs by Account Management, Demand Forecasting and Customer Supply.
(Note – to clarify “new data capture” in Figure 2 – at-risk SKU’s by Account were reported at monthly Account Planning Meetings but not formally recorded in any system. Demand Planning tracked promotional status in a spreadsheet which needed to be replaced for the purpose of calculating at-risk volume by SKU by week.)
SKU at-risk status flags were to be set automatically by calculations on existing data (i.e., forecast v hurdle rates, and event status) but Account teams would maintain,
by exception, at-risk status flags where demand is known to be at risk/not at risk despite contrary indications from existing data.
At-risk demand by SKU would be used to drive materials scheduling for limited-use materials only. No direct link to MRP was proposed.
The composite demand on multi-use materials was not computed within this development.
This left the possibility that at-risk demand could simultaneously turn bad for a number of SKUs sharing a material, with the result that demand for a multi-use material disappears unexpectedly.
(By virtue of its multi-use, the material would normally be regarded as low risk.) However, there was a simple automated solution to the classification of limited-use
(as opposed to single-use) materials which, with a little manual intervention, could provide a workable solution without complex MRP calculations.
I am not going into the arithmetic of how at-risk volume by SKU was calculated. Suffice it to say these were relatively simple calculations on extracted data.
To determine materials at risk
• SKUs at risk need to be related to materials through the existing bill of materials.
• Filter out sub-classes of materials that do not need to be scheduled by the materials planning function.
• Filter materials by SKU count. Materials used by single (or a few) SKUs are at greater risk than materials with many applications.
• Categorise materials, i.e., high/medium/low risk according to the status of parent SKUs.
Ideally, categorisation of limited-use (as opposed to single-use) materials would be determined by calculations on the aggregate demand for the material,
which involves MRP processing. Again, I am not going into the arithmetic, but we were able to make reasonable external calculations so that no modifications to MRP systems were necessary.
Consequently the new material control system could be built using existing reporting tools (or spreadsheets)
and operated entirely from MRP system downloads and two simple schedules maintained by the Customer Account Management and Customer Supply teams.
In this case, materials supply was to be run using two default re-order policies (for low and medium-risk) and ‘by exception’ for high risk items.
Features such as prioritized listing, ‘traffic light’ displays of at-risk status, and alerts of potential stock run-outs and excessive stock levels,
substantial short-term deviations between forecast and actual demand, recommended changes in order policy, could all be incorporated very easily…
so facilitating management by exception.
A one-off exercise would examine costs of different materials order/re-order policies. New cost models for each SKU could then be adopted according to the relevant re-order policies.
Product-line profitability and commercial forecasts will reflect the reality of supply chain operation.
Another benefit is the ability to share with key suppliers the nature of the uncertainty within forecasts, enabling a more collaborative approach to risk management.
So what does this approach give us?
• Visibility and control of the availability, and scheduling of inbound supplies to enable the right materials to be in the right place at the right time,
i.e. no shortages, and minimal stock redundancy.
• Coherent financial and supply chain forecasting.
• In-bound supply chain management by exception, and
• In this case a 15% reduction in staff to control the supply chain.
References:
Terry P. Harrison, Hau L. Lee and John J. Neale (2003). The Practice of Supply Chain Management, Springer
ISBN 0387240993
Sunil Chopra, Peter Meindl (2009) Supply Chain Management: Strategy, Planning, and Operation, 4th Ed (1st Ed 2000)
Prentice Hall, ISBN-10: 0136080405, ISBN-13: 9780136080404
Go to top
It is commonplace for businesses to put great importance on their forecasts.
And, at the insistence of the Finance Department, businesses often operate with a single demand forecast on which the financial forecasts and other forecasts (e.g., labour and materials requirements) are based.
After all, how else will the actions of the various departments be aligned? But of one thing we can be sure, the forecast will be wrong.
Over the years, I have witnessed many debates over the accuracy of forecasts and whether the numbers should be higher or lower.
Marketing and Sales departments are often optimistic, accountants want to be prudent, manufacturing and procurement are torn between the risk of a shortfall in supply and the threat of unwanted product.
The protagonists are usually missing the point. Higher or lower, the numbers will still be wrong.
The key question is, “What is the likelihood of actual demand being higher or lower, and by how much?”
Without examining the probability that demand will fall within a range of values, how is the organisation going to plan to deliver against actual demand and, at the same time, have an effective means of avoiding waste and redundancy?
Let me take a particular example from food manufacturing and retailing. The example could easily apply to many fast moving consumer goods (fmcg), and more widely to other products.
The principles can also apply to many services (we have experience across manufacturing and services, in private and public sectors),
and I can think of cases in areas as diverse as effluent treatment and scientific research, where opportunities existed to improve resource scheduling by better understanding the components of demand.
Fmcg, and foods in particular, are interesting products to study because they exhibit substantial variability and volatility of demand.
Demand fluctuations arise not just from seasonality and direct consumer preferences, but also from influences such as weather, from the promotional activities of competing manufacturers, and from the practices of the major retailers.
Indeed, managing the allocation of retail shelf space to maximise turnover and gross profit has become a major factor in determining fmcg demand at individual product (SKU) level.
I am often amused by managers in other industries who process demand using simple queueing systems (as many public services do) and say that demand and supply management has no relevance because their demand is unpredictable!
Try second guessing a major retailer who will not confirm product listings within the lead time for packaging.
And try being at the vagaries of the British weather: ice cream is easy; it’s the processed, short-shelf-life chilled foods (salads for example) that can take off if the sun is shining, but bomb if it rains...!
You have to try, and succeed, if you are to retain your position as a leading supplier.
So where does this take us, where forecasting is concerned? One has to consider the key elements of demand.
Take our food product. Some key components of demand are shown in Figure 1 below.
In Figure 1, the difference between the upside and secure demand peaks at week 8 and again at week 16.
At week 8, upside is 137% and downside is 57% of Forecast.
This can be a big problem if you are, say, manufacturing in the UK, sourcing packaging from the Far East (shipping 6 weeks, order turnaround 2 weeks).
If the total stock in the supply chain is running at say 12 weeks, by week 8 you could be down to 2 weeks safety stock (at demand upside).
Alternatively, you could have 26 weeks stock (at demand downside) and, by then, a product in terminal decline.
Because the number of weeks stock is based on a snapshot of demand (and demand may still be falling) this stock could easily exceed lifetime demand… and the outcome is redundant stock.
Cut back too early and you face the other risk: the promotions run, are successful, and the product takes off.
By the time you can get more stock through the pipeline, your safety stock is gone and sales are supply constrained.
Of course, depending on their competence, Manufacturing and Procurement have wised up to these vagaries.
They and other Departments are soon working to their own versions of the forecast! So activity levels and associated costs are now running at variance to the financial forecast.
And what about the market intelligence on those promotional activites and supplier listings?
Other unofficial commercial forecasts are probably not reflected in the starting figures that Manufacturing and Procurement have manipulated.
So you can see the sort of mess businesses get into.
In the case of the food product, to enable the right ingredients and materials to be in right place at right time, i.e. no shortages and minimal stock redundancy,
we have to capture and utilise essential outputs from the processes for new product development (NPD), existing product development (EPD), the delisting of products, and the commercial forecasting processes.
Other products or services will have similar/different components of demand to the ones outlined above.
These need to be identified and classified according to their risk, and assessed over a timeframe that reflects lead times, manufacturing and/or delivery cycles, and stocks in the supply chain –
i.e. up to the point at which variability in demand is unimportant, because responding within that timeframe is not an issue.
Next week I will look in more detail at the data and processes that will enable us to manage supply, in particular the control of at-risk items;
this will include the application of different order and re-order policies for components and resources where final product demand is at risk.
This blog is inspired (if one can use such a positive term in response to frustration) by discussions within the Professional Interim community, and shambolic electoral processes first observed in the May 2010 General Election.
I wrote to various interested bodies in June last year on the subject of whether we should be taking action in light of Government plans to impose blanket restrictions on the hiring of ‘consultants’, and the likely consequences both for Professional Interims (given the lack of differentiation between interims, consultants and contractors) and for the public sector reforms themselves. The Cabinet Office went on to introduce such restrictions, and the anticipated consequences have come to fruition.
Arguably the AV Referendum itself was a complete waste of money. With the votes split approximately 70/30 against reform and general apathy within the electorate, the ‘Yes’ votes numbered only 6 million. Only 10 of the 440 counts were in favour – inner-city areas with low turnout. Were it not for the Local elections the overall turnout may well have been lower than the recorded 42%. Even the Liberal Democrat heartlands of the South West showed little enthusiasm for AV, with the exception of Bristol, all returning less than 40% in favour.
The outcome: £90m flushed away as a sop to the Liberal Democrats, even though it was not what they or their supporters really wanted… wasted at a time when we are desperate to cut costs and reduce the budget deficit.
What’s done is done. But can we learn from this fiasco?
In competitive businesses, in manufacturing and service industries, management will take simple steps to ensure that processes are reasonably efficient, effective and adequately (but not over) staffed.
Having witnessed counts in 3 locations across both the May 2010 General Election and the Referendum, it is apparent (to the informed outsider) that the polling and counting processes are grossly inefficient. Yet public sector officials presiding over the process are praising the counters for a job well done, whilst seeming blissfully unaware of the potential to reduce costs. Now the views expressed here are not the result of a scientific study, nor are they necessarily representative of the country as a whole. But they give some insight to what probably happens in polling stations and counting centres across the country.
We have some extreme examples of inefficiency: staffing costs at one polling station were £14 per vote cast. (This is not in a sparsely populated rural area, and the station in question is a mile away from the nearest alternative.) A more representative example of waste is the idle time within the counting process, estimated at 33-50% across the stations/counts observed.
Rather than go through a list of what is wrong with existing processes, we might focus on the positive. How can the efficiency and effectiveness of the counting process be improved?
No lengthy or detailed observations have been made outside of the counting process, for example at polling stations, or within the Electoral Commission. In the light of observations made within the counting process, one has to question the role and effectiveness of the Commission itself. It may be that the deficiencies observed are within delegated or devolved authorities. Nevertheless, from limited evidence obtained within the counting halls, it would seem that there is cause to review the number, location and staffing of polling stations, and the flexing of staff numbers according to anticipated use across the day.
We are not talking here about radical reform. Back-of-envelope calculations indicate, in this case, savings potential of 10-20%. Why is it that the public sector is so fixated with cutting services when there is such scope to deliver efficiency savings?
We say, “Bring on the Professional Interims and let them sort it out.”
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