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What Happened to Ethics, we ask “Professional” Services Providers!

Bad buying obviously covers every potentially sector and category, but I have had a long interest in professional services spend and procurement for many years, including as co-author of “Buying Professional Services”, my first published book.

A couple of recent stories highlighted that although most of the people working in that sector are highly educated and intelligent, they can still behave just as badly and even illegally as any petty criminal.

The first story was about a survey of lawyers run by the “rolllonfriday” website, anonymous of course given that 35.5% of the respondents admitted that at some point they have been guilty of adding time that hadn’t been incurred to their time sheets (which then means the invoices to clients are also inappropriately inflated). As the report said,

Thirteen percent admitted they did it regularly, 12.6% confessed to being “occasionally” culpable, while around 10% said it was something they had done, albeit “rarely”. 

Well, that probably won’t come as any surprise to most of us, but it was interesting to see our suspicions as cynical buyers confirmed. It reinforces the view that whenever possible, engaging professional service providers on some sort of fixed fee, outcome, output or success based basis is better than a simple “time and materials “ hourly or daily rate.

However, it can be difficult in the world of law, because we often don’t know just how much work will arise from a particular assignment, particularly if other parties are involved (litigation for instance). So it is hard for the parties to arrive at a sensible view of risk, which you need in order to agree a fair fixed price.

You should always look for where you can define some sort of clear work package and agree a price for that, but one thing buyers can also do is challenge their provider if bills look “padded”.  Many people feel nervous about actually digging into a statement and saying to their lawyer, “so did you really spend 30 minutes on that two-line email”?

Now they are unlikely to immediately back down and reduce that bill, but next time, they might just think “perhaps I’ll just put 20 minutes for this email” because they know you will challenge. So don’t be scared to be a nuisance and analyse billing carefully.

The second piece of news was even more shocking. Consulting and auditing firm KPMG was fined  in  the Netherlands for endemic cheating around professional examinations taken by their staff. As the Times reported, “The Public Company Accounting Oversight Board in the United States found that between 2017 and 2022 hundreds of KPMG workers in the Netherlands, including senior partners and managers, had shared questions and answers with one another. This included for exams that they had to sit to test their understanding of professional ethics”.

Cheating on an ethics test! You have to laugh really. But I don’t understand why it is the US regulator doing the fining though rather than the Dutch equivalent.  

To make it worse, KPMG lied to the investigators, saying they knew nothing at senior levels about the answer sharing – but it turned out two board members had indulged in these activities themselves! A $150,000 fine was also imposed on Marc Hogeboom, who used to run KPMG’s Dutch audit division, and he was banned for life from working for any firm that audits American public companies.

These people are auditing public companies and giving investors confidence (or otherwise) in those businesses – so having the right skills and training is critical beyond just KPMG’s own operations. The cheating means there may be incompetent people doing important work, which is not a good thought, and of course it means buyers have paid for people whose qualifications (which largely determine the level of fee paid) were bogus. Maybe some big clients should sue the firm now.

It seems that it isn’t the first time this has happened and KPMG is not the only firm that has transgressed. Last week the American regulator also fined Deloitte’s businesses in the Philippines and Indonesia $1 million each for answer-sharing on professional tests. And two years ago EY was fined $100 million by the US Securities and Exchange Commission, because a “significant number” of its American auditors cheated on the ethics component of their Certified Public Accountant exams.

The lack of ethics and morals of those involved is quite shocking for supposed “professionals”. Whilst the latest fine was substantial, it does not seem to be enough really to reflect the seriousness of the crime. I think it would have been appropriate to ban KPMG from all audit work in the Netherlands for a few years. I also think maybe a few jail sentences for the most senior people involved might have made others sit up and take notice.

So the advice to procurement people is this. As with the lawyers, don’t necessarily believe everything your consultants or auditors tell you, or everything they put on the invoice, just because you think they are ethical and trustworthy professionals. Not all seem to fit that description.

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Mone Moans, But Still PPE Questions to be Answered

Over the holiday period, we heard a lot more about the case of Medpro, the firm that is being taken to court by the UK’s Department of Health and Social Care over the supply of PPE, gowns in particular, which allegedly turned out to be unfit for purpose. The beneficiaries of this, the high profile Michelle Mone, a member of the House of Lords, and her husband Doug Barrowman, produced a documentary arguing their side of the case, and gave an interview on the BBC. This came after the couple had originally denied publicly that Medpro was anything to do with them, with Mone lying to the press and then getting lawyers to issue threatening letters to various publications.

The general response to all this new self-generated publicity was not very favourable for the couple. The interview was called a “car crash” and was likened to the Duke of York’s famous “I was at Pizza Hut and I don’t sweat” interview with Emily Maitlis in 2019. There are some questions though which still need answering on the government’s side of the story.

  • Why is this the only legal case that the government appears to be pursuing? There have definitely been other examples of quality issues, and cases of firms that look at least as dodgy as Medpro winning major PPE contracts. Is there a logic to this or has the government chosen to pursue Medpro because of Mone’s profile, know there would be more publicity given her involvement and that would show the authorities were taking action?
  • Mone claims that she has an email from an official on the PPE team saying, “the gowns have been approved by technical”.  But that seems to be pre-delivery so the approval was before anyone had seen the actual delivered product, which seems odd. Maybe there were samples? But the gowns were apparently inspected by Uniserve, the logistics provider appointed by the government, from July 2020 in China.  And £122 million was paid out in the summer of 2020 for the gowns, which would usually suggest the buyer is content with what has been delivered. 
  • The government says that random testing in April 2022 found that 54 of the 60 randomly selected Medpro gowns weren’t sterile. But that is almost two years after delivery. Even if those tests were accurate, Medpro lawyers may argue that the gowns might have become unsterile in the intervening almost two years, perhaps because of sub-optimal storage conditions?
  • As a buyer, if I have inspected the goods, told the supplier they meet my specification, and handed over the payment as per the contract, then it is pretty unusual, and very difficult to go back a year or two later and say, “hang on a minute, I’ve had another look and I don’t like that stuff I bought from you after all”. In my experience, the supplier would be likely either to laugh or (if they valued my business) say something vaguely sympathetic such as, “Peter, you said it was fine – you must appreciate we can’t really do anything at this stage, terribly sorry”.

However, the fact that Mone lied about her and Barrowman’s involvement and personal gains from the deal is a major issue working against them. There is also the question of alleged bribery. This has been part of the investigation, but there has been no hint as to who it was that Medpro might have  bribed. Their political contacts? PPE procurement people? Other officials?  Flows of money are usually relatively easy to check, unless it is literally £50 notes in a brown envelope, so that’s still an  interesting unanswered question.

In any case, this is likely to be a big story through 2024, not least because Labour will emphasise “Tory sleaze” when it comes to the UK election. Labour has also promised to appoint a “covid corruption commissioner” to look into PPE contracts, so this story will no doubt run and run.

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Coldplay go Legal – Dodgy Specifications Involved!

In recent weeks, it feels like I have been writing about pretty serious topics here – HS2, social value, fraud, failures in local government procurement in the UK and the like. So a story I saw recently was attractive as a topic because it wasn’t a matter of life, death or wasted taxpayer money. It was however (allegedly) about a waste of multi-millionaire rock star money. It was also an illustration of a key point that is forgotten surprisgly often when we’re writing specifications and talking to suppliers.

The band Coldplay has gone through an interesting critical trajectory. The hip and trendy NME made A Rush of Blood to the Head album of the year in 2002; but over the years, many started seeing them as purveyors of somewhat dull, middle-aged music. I’ve always thought they were fine songwriters although recent material is a little MOR for my tastes. But what no-one can deny is the level of their success – over 100 million albums sold and still the 14th most listened to band on Spotify today.

For some 22 years, their manager was Dave Holmes. Little is known about him, but more is coming out now as he and the band are busily suing each other. He started legal action in the summer, claiming £10 million from Coldplay in commission on earnings that (he sasy) they have not paid him. But the counter-case from the band is looking for £14 million from him, saying that he has wasted millions of their money. 

And this is where it gets Bad Buying interesting. Much of the claim is around preparation for the huge global Music of the Spheres tour, for which Holmes held ultimate responsibility. By the way, that tour took $617.8 million in ticket sales alone. (Ever thought you are in the wrong business?)  The band claims that costs escalated  and say that equipment was not suitable or was bought at inflated prices. As the Times reported;

Examples in the claim are eye-watering. They include, “16 bespoke stage pylons” for lighting and video that, it allegedly soon became apparent, would be unjustifiably expensive to even use. However, it was too late — €10.6 million had already been chucked at the pylons.

A “visual project known as Jet Screen” was commissioned for $9.7 million, with a huge chunk of that cost, the band claim, personally authorised by Holmes. The problem was that … the dimensions given to the manufacturers for the Jet Screen were wrong — and it was too big. It was only used for ten concerts in Buenos Aires.

Yes, it’s another “Irish government printer” faulty specification story!  In the Bad Buying book, we have the case study of the Irish government buying a state of the art printing machine that simply did not physically fit into the building that was supposed to house it. That was a reminder that sometimes getting the specification right is not a matter of highly complex technology or difficult outcome-based definitions – it can be as basic as the physical measurements!

The Times draws a parallel with the classic Stonehenge scene in the best comedy film of all time, Spinal Tap, where the band commission a model to use on stage – and when it is delivered, it turns out to be tiny. But in this case, the Jet Screen was just too big.

Holmes is also accused of not opening “the shared online Dropbox which contained the designs for the Music of the Spheres Tour at any time between August 2020 and February 2022”.  Rock and roll madness right there! More interesting is his relationship with Live Nation, the promoters of the tour. Holmes had taken loans from Live Nation at what look like preferential terms and the band say he owed some £27.5 million when he was negotiating terms for the tour with the firm. This, say Coldplay, was an inherent conflict of interest, and if those facts are acccurate, that does have some validity in my opinion. It is an interesting situation without a doubt – I certainly wouldn’t want one of my procurement managers negotiating with a supplier if she owed them money.

So we’ll see what happens next. And just remember, if you’re buying anything in the equipment line, just make sure you know how big you really want it to be! Many elements of the specification may be much more complex in many situations, but let’s face it – size really does matter.

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Asahi Centralises Procurement – Will It Work?

Japanese brewer Asahi is setting up a new global procurement operation in Singapore, according to the Food Navigator Asia website. The target is to save $100 million a year from 2024. The new CEO of the operation is Tomas Veit, who told the publication, “the key focus is currently on creating a strong and capable team to provide efficient and effective services”.

But the bigger issue is the internal dynamics in the firm. What worries me here is this statement from Atsushi Katsuki, President and CEO, quoted in the company’s press release.

“Asahi Global Procurement is the first functional organization of the Asahi Group to be integrated globally. We view this as an initiative to elevate our management to a new level and promote the advancement of overall management. We expect the consolidation of category management and sourcing functions on a global scale to not only create group synergies, but also contribute to solving various issues in the global environment and society, leading to the promotion of sustainable procurement.”

So procurement is the “guinea pig”,  the early adopter of a new corporate strategy of more centralisation. I understand why firms often see procurement in that way – it looks like an “easy” area to start the centralisation journey and show rapid savings. But any business school or CIPS course would suggest that procurement strategy must be aligned with corporate strategy. In cases like this, the corporate strategy isn’t changing, and countries or regions still have considerable autonomy. However, the procurement strategy is now mis-aligned, so it is an outlier or an experiment in effect.

That is not to say it cannot work. But Veit will have to be prepared for considerable push-back from those who hold power locally. They won’t just be concerned about losing some power to choose suppliers and make procurement decisions – they will see this as the thin end of the wedge, a wedge that could lead to much more significant power loss if procurement is successful.

There is also the supplier side to consider. Many years ago, I was trying to set up a Eruopean procurement capability for the Dun & Bradstreet Group (when it included about 10 different businesses). We spent a fortune on car hire, so that looked like a fairly easy quick win. I negotiated a great deal with Avis for all the major European countries, leveraging our spend across the continent. The senior European account director for Avis assured me she had given me the very best pricing.

After a few months, I asked our businesses if they were using the deal. No, said our Spanish operations. They weren’t. So which supplier were they using, I asked?  “Oh, we’re using Avis, we just get a better deal from the local operation”, they said. That taught me a good lesson – sometimes suppliers aren’t set up to implement global or regional deals. So that’s something for Asahi to consider.

There is also an interesting dilemma for the CPO. I am sure that there is significant value that a central function can bring. That includes areas such as developing skills across the function, potential harmonisation of systems and data, support in specialist areas such as commodity price forecasting, and of course developing strategic and long-term initiatives with the most important global suppliers. It is interesting that sustainability is mentioned explicitly in the press release above; that is certainly an area where I can see some strong potential actions and benefits.

However, the new central team might struggle to show direct “savings” arising from this type of work. Because of that, there may be a temptation to look for those apparently obvious quick win, leverage-based, price-focused savings – my car rental deal, for instance. And those projects can be exactly those that will run into local opposition.

My advice to Veit therefore would be to look for a few large potential quick wins in areas that are not too contentious. Major IT contracts perhaps – some global licence deals or a major deal with a hosting service? Or areas where you are not even asking people to change suppliers. A global set of route deals with Japan Airlines maybe? Then combine that with delivering longer-term value in terms of the longer-term imperatives. Work hard to get the local or regional barons on your side (they can get you fired if you don’t).  And remember that bigger deals aren’t always better deals.

But Veit does have one major advantage – several years’ experience already with the firm. That gives him a much higher chance of success than a CPO brought in from outside with what might turn out ot be a controversial mandate. We wish him luck and success. 

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Why Isn’t Competition Working in the UK Petrol Market?

Why are prices so high in many countries, including the UK? Global forces and events are part of it, but there is increasing evidence that firms providing goods and services are increasing profit margins at the expense of the consumer. This week’s report on petrol prices in the UK from the Competition and Markets Authority (CMA) was an example of this. Calculations show that margins have increased over the last three years and we are all being ripped off to the tune of some 6p per litre. Competition was “not working as well as it should be” said the CMA.

But surely, in a dynamic, capitalist society, excess profits leads to new market entrants, who compete on price and undercut the current providers, whilst still making an adequate return?  The economists would agree that this is the case – but only in a perfect market. And you need certain conditions for that, including that it must be reasonably easy for new entrants to establish themselves.

That is the problem here and in many other markets. For a number of reasons, there are so many things we all buy where we just don’t see real, strong competition, because it is almost impossible for new entrants to break into a market.  Look at petrol retailing. Finding new sites and getting planning permission would be a nightmare. The capital cost of building the premises would be huge, with all the legislation (quite rightly) around petrol storage and handling adding to the burden.

Look at how difficult it has proved for new retail banks to break into a market still dominated by firms that have been around for centuries – even though most consumers don’t rate those providers very highly.  We haven’t had any new supermarket chains in the UK for some 30 years now since Aldi and Lidl (who were already long established elsewhere) started here. Again, the barriers to entry, from planning issues to up-front cost, as well as the financial power of the incumbent firms, all make it very tough.

So we have the cost of entering a market, legislative burdens and incumbent power as key barriers to entry. Geography is another; I’m not going to drive another 10km each way to buy slightly cheaper petrol, and lose all my “savings” on the extra mileage!

But particularly when we come back to corporate procurement, some of the market dominance we see has been caused in apart by the actions of customers and indeed of procurement professionals. I gave five examples of the ways in which this happens in terms of corporate procurement in the Bad Buying book. Here are the first two.

1. Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries, only the largest can meet our needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, who often offer real innovation, flexibility and service, are shut out of the market.
Buyers assume economies of scale, that “bigger is better” and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you  see dis-economies of scale – the buyer pays more as the they spend more.


2. Buyers value consistency above innovation and experimentation. At times, you should value tried and tested solutions over exciting new ideas. “Ladies and gentlemen, welcome to the flight, this is the very first plane to be fitted with an exciting new automatic pilot system, and we will be turning it on once we’re airborne”.  You might not want to hear that!
But take caution too far, and you help create markets dominated by a few large suppliers, with increased risk of buyers suffering from dependence. That’s relevant in private firms and perhaps more so in government, where risk aversion from employees and politicians means companies get into dominant positions because buyers “know” they’re a safe choice. That doesn’t always work out – Serco and Capita seemed to be safe for major UK government work, until both ran into severe financial difficulties. More willingness to engage with other initially smaller suppliers over the years could have created a more dynamic market.

Whilst we may not be able to do anything much personally about the supermarkets dominance of the petrol (and groceries) markets, we can take actions to mitigate the risk that we accidentally help to create monopolies or oligopolies in our business (procurement) lives. We should aways be thinking about how we can contribute to dynamic, competitive markets, with new entrants regularly arriving to put pressure on established firms. That’s the healthy situation that we should hope for and work towards where we can.

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Twelve Tips for Presenting to a Procurement Audience

As we are in the midst of the late spring conference season, I thought I would re-visit and update an article I wrote some years ago for the Spend Matters website. This is aimed primarily at solution providers who are speaking to a procurement audience, rather than procurement practitioners who might be speaking, although much of the advice is still applicable.

My definition of a “successsful” session is that the presenter gets across whatever message they aim to communicate, be that education, information, or a sales proposition, and the audience finds it worthwhile, ideally in terms of both enjoyment and usefulness in some sense.  Some direct or indirect leads resulting from the session would be even better. So here are my suggestions, based on my many hours of enjoyment and probably an equal amount of suffering at these events.

  1. The procurement audience is not really interested in the history of your business (unless it is REALLY fascinating), how many factories or offices you have around the world (particularly if you are speaking to managers who only operate in one city), or even the detail of your latest financial results. We will check out those things if and when we start to work with you.
  2. So keep the general background on the firm brief – when it was founded, approximately how big it is, what you do. Two minutes. The same applies to you personally. Two or three sentences about your background is enough. I’ve seen speakers spend half of their valuable time giving background that I guarantee no-one in the audience cares about.
  3. The audience does understand that you are there to promote your own firm, so don’t feel shy about doing so. But there are ways of making that interesting for the audience.  Detailed product / service descriptions are rarely a good use of time. Similarly, actual demos (of software for instance) often lose much of the audience and can easily go wrong. A few screen shots can be useful though.  If you have an exhibition stand at the event, you can offer to show delegates the product there.
  4. Think of the presentation in a similar way to the wider sales process. What is the problem or issue that the target audience is facing, and how does your offering help to solve that? Describe the issue, put it in context, explain why it matters, then outline how you can help. A little bit of looking to the future can be included and adds interest – “our new product, out later this year, will do this even better…”
  5. Don’t be afraid of making direct comparisons with your competition – but be honest of course. Even if a procurement executive sees the need, they will be wondering why they should buy your product and not someone else’s.  Don’t criticise the competition too directly, but feel free to say, “our product does this and this which no other competitor can provide”.  And there is nothing wrong with saying “we also have the lowest cost product on the market” if that is one of your selling points!
  6. If you work with many organisations on the buy side, you have an overview that each buyer may not have individually. That puts you in a good position to talk about broader issues, or the best practice you have observed, or provide “war stories” about positive or indeed negative things you have seen. Often, speakers only get into this when it comes to the questions, but that broader view can bring insight to the audience during the presentation.
  7. Surveys, reports and similar that your organisation has done or contributed to can provide interesting content – but be careful of the “so what” factor. The number of times I’ve heard a speaker saying “43% of procurement directors say they don’t have the right technology…”  Well yes, but so what? Check that anything of that nature is relevant to your message and genuinely interesting to the audience.
  8. The question and answer session should be key. Debate is good, you can reinforce some of your key points, and even find out if you have interested prospects in the audience. So leave enough time. In a 30-minute session, I suggest 5 minutes for the introduction (you will inevitably start 2 or 3 minutes late), 15 minutes of core content and 10 minutes for Q&A. Have a question you can put to the audience in case no-one volunteers – “I mentioned the issues with managing stakeholders in the health service –  has anyone found a good way of involving senior clinicians in these decisions”?
  9. Humour is fine if you can pull it off, but obviously be careful! Getting some involvement or reaction from for the audience early on is another tactic which increases participation and focus (personally, I find it also relaxes me as a speaker). If you don’t have a joke (a mildly amusing remark about something in the news can often work), maybe ask a question just to get some early engagement, relevant to your topic of course. “How many people here have sustainability as a key objective this year”? 
  10. Do a timed run through (even if it means talking to yourself on the train on the way to the event) to check the timing. There is nothing more frustrating than a speaker who says, “I’ve only got a few slides, I’ll speak for 10 minutes then we can have a good discussion” and then waffles on for half an hour.  Running out of time is amateurish and speaks of a lack or regard for the audience.
  11. Any slide that is on the screen for less than a minute or so is usually worthless (unless it is a clever, quick visual joke or something similar!) Equally, a slide with so much content packed onto it – words, charts, tables, diagrams – that no-one beyond the first row can read it is a waste of time too. If you have anything of a complex nature that you really want to communicate, put it on a hand-out. It is a personal thing, but I would tend to use between 8 and 10 slides for a 15-minute session. Trying to fit 30 slides into 15 minutes rarely works well.  Not using slides is fine too, but you need to be a really good and confident speaker to pull that off.
  12. Presenting does not come easy for everyone. But do try and bring some energy and enthusiasm to the session. You are in effect entertaining the audience as well as imparting something useful. If you look or sound like you don’t want to be here with us, or it is clear that you haven’t put much effort into the session, why should the audience bother listening or engaging?

If you have thought clearly about your session, prepared and rehearsed well, you will feel better and more confident. And that means the audience will have a better experience too. Good luck!

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TSB Systems and Contracting Failure- CIO Fined

In my Bad Buying book, I wrote about the IT disaster that affected millions of TSB bank customers back in 2018. Here is the story from the book.

“In 2015 Sabatell acquired TSB, a UK-based retail bank, formally part of the Lloyds TSB Group. TSB at some point needed to move onto its own IT platform, rather than continuing to use the Lloyds  group systems, as they were now competitors to their former parent company. But the move, in April 2018, turned into a disaster.

Account holders couldn’t use mobile or Internet banking, and some reported seeing accounts details from other account holders. Customers struggled for weeks to make mortgage and business payments, as the new TSB systems failed to function properly. The issue was serious enough to be raised in the British Parliament, and in September 2018 TSB’s CEO, Paul Pester, resigned.

In March 2019 The Sunday Times reported that an investigation into the affair put much of the blame onto the IT firm that handled the transition.13 However, the twist was that this firm was SABIS – which is part of the Sabatell Group itself. So although it has a separate identity, this was in effect the internal IT function of the group that owned TSB.

Reports suggested a range of technical and programme management issues around the deployment of new software, rather than problems with the underlying infrastructure. But whatever the cause, the whole episode cost TSB £330 million,14 and there is a  ‘provisional agreement’ (according to the firm’s annual report) for SABIS to pay TSB £153 million. In November 2019 an independent report from law firm Slaughter and May concluded that the issues arose because ‘the new platform was not ready to support TSB’s full customer base’ and, second, ‘SABIS was not ready to operate the new platform’.

Questions have to be asked about the choice of ‘supplier’ here. Was SABIS the right choice to carry out this challenging task? It certainly doesn’t appear so, in retrospect. Did TSB have a choice, or was the firm told by top Sabatell management that it had to use SABIS? Would a firm with a wider and broader experience of banking systems than SABIS have done better? And why didn’t TSB accept the offer of help from Lloyds, which was made as soon as news of the problems broke?”

Now, five years later, there is an interesting postscript. Carlos Abarca, who was the TSB chief information officer, has been fined £81,620 by the Prudential Regulation Authority (PRA), the body that provides oversight of the UK banking system. In their 35 page report, they explain how Abarca’s failure caused a debacle that might have threatened financial stability more widely.

He apparently ignored early signs that the migration was not going well before the big switchover. He “did not ensure that TSB formally reassessed Sabis’s ability and capacity to deliver the migration on an ongoing basis”. Sabis told Abarca that they were migration ready and that subcontractors had given written confirmation that their infrastructure was fit for purpose. but the Authority felt this was not enough because the statements were caveated with comments about outstanding tasks. Abarca also did not obtain a written updated confirmation of readiness from Sabis when he told his own Board everything was ready for the transition.

The PRA said, “Mr Abarca’s failings undermined TSB’s operational resilience and contributed to the significant disruption TSB experienced to the provision of critical functions and potentially impacting on financial stability”.

This might be the first time a senior executive has been fined and disgraced for a failure in contract and project management. Now clearly in most industries, there is no equivalent of the PRA to  carry out this sort of investigation and take such action if someone screws up in a similar manner. But if you are in the financial services industry in the UK, it is a warning. If you are responsible in some way for operations, and that includes some procurement and contract management activities, then you must be very careful and must conduct your work with considerable diligence. And make sure you cover your back carefully at every point if a supplier tells you, “yes, everything is fine, don’t worry”!

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Procurement “Transformation” and Supply Base Reduction

I’ve had a couple of abortive attempts at writing a book about “procurement transformation”. Perhaps one day it will happen. But my feeling over the years is that often presentations at conferences that claim to be about “transformation” are nothing of the kind. They might be about upskilling the function; or implementing a new piece of software; or launching a category management programme; but the ideas they describe are not really transformative. And in some cases, the central aim or achievement of the programme appears to be simply a reduction in supplier numbers.

There is no doubt that many organisations do have a supply base which is too large to achieve optimal performance or value.  So a reduction in supplier numbers can be beneficial – but the point is that it is usually not appropriate to consider supplier reduction as an end in itself. Rather it should be seen as one of the outcomes of a wider procurement improvement or transformation programme.

An excessively large supply base usually develops because of a lack of procurement spend visibility, control or influence. Budget holders decide where and how to allocate their money, leading to fragmented and un-coordinated spend. Hence getting such situations under better management will bring a number of benefits, and an effective procurement programme, probably category management based, will be needed to address matters. And even today, most organisations, in most categories, will find that the result of a well-planned and executed sourcing programme is fewer suppliers in that area.

So supplier reduction as an outcome of an appropriate programme can indicate real benefits have been achieved. Fewer suppliers means more concentrated spend, and there can be benefits from this aggregation. Although economies of scale are over-estimated in many industries and sectors, it is clear that when most organisations look carefully at a category, and find dozens or hundreds of suppliers, they derive benefits when they come to negotiate with a view to reducing that number.

But in some cases, the “right” answer once a spend category is considered will be more suppliers, not fewer. If the analysis shows that the organisation is worryingly dependent on certain suppliers, then that should be the desired approach, for instance. My personal baptism in procurement was a role where I was at the mercy of a monopoly supplier of a vital raw material. It was not a good place to be and I longed for “supplier increase” rather than supplier reduction!

Or even if risk is not the issue, there may be value opportunities through taking a more aggressive and tactical approach to a market, with frequent supplier switching. We should not be afraid of strategies that lead to more suppliers – as long as the benefits are weighed against the true costs of supplier management into account. So here is a summary of key points to consider.

  • Supplier reduction should be a potential outcome from doing procurement well.  It is rarely sensible as an objective or end in its own right, and it is not the most appropriate strategy for every occasion.
  • Understanding the starting point or baseline is important for any major procurement improvement initiative. And if supplier reduction is part of the business case, it is vital to have a clear and accurate view of the baseline. Supplier numbers are often overstated, though duplication or mis-categorisation, so a spend analysis maybe required as a starting point.
  • Similarly, if the savings from supplier reduction are going to form part of the business case for a procurement programme, the true cost of managing suppliers needs to be assessed, as well as realistic savings form any re-negotiations, so any savings can be calculated with realism and as much accuracy as possible.
  • For any category, and certainly before any supplier reduction initiatives are set in train, procurement must ensure that there is a good understanding of the markets, suppliers and associated risks that are being addressed.
  • Supplier reduction can be a sensitive issue amongst stakeholders and budget holders, who may see their favourite suppliers disappear. The benefits of rationalisation programmes may not be very visible to stakeholders either. So it is important to get the buy-in of your key stakeholders and engage them in the process, particularly if you are trying to make dramatic change.

That last point is important but often disregarded. Managing the internal stakeholder dimension is often more challenging for procurement than managing external markets, and needs significant focus. That is always true, but particularly applies when a major change in the supply base is likely. Indeed, I’ve seen that point in itself be enough to kill procurement change or transformation programmes stone dead.

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Remember the Procurement Basics!

Not a Wetherspoons to be honest – the picture shows my favourite pub in the world, the Strugglers Inn in Lincoln

No matter how much we like to talk about sustainability, complex strategies and supplier relationship management, procurement has some basic elements that cannot and must not be forgotten.  A couple of recent cases act as a good reminder of that.

The first is a dispute between Wetherspoons, the leading UK pub chain with 843 branches, and AB InBev, the world’s largest brewer (they produce Budweiser, Beck’s, Stella, and also some beers that aren’t tasteless).  In November 2021, Wetherspoons agreed to make AB InBev their lead brewer (“preferred supplier”) of mass-market lager, replacing Heineken. ‘Spoons, as it is affectionately known, sells a good range of real ales and interesting cask beers but still offers the standard products too for the less discerning drinker.

But the dispute relates to disagreement over who is going to pay to install the T-bars (the branded fittings that include the keg beer taps) in all the Wetherspoons pubs. The argument has gone to the UK high court now, to decide which company should be responsible for carrying out the works needed to fulfil a contractual requirement for pubs to display a set number of AB InBev beers on their T-bars. Wetherspoon claims that both parties believed the brewer was responsible, in line with standard industry practice. AB InBev denies this, saying the work should be subject to a sperate agreement.   

For two such large and apparently professional firms to be arguing over this seems incredible really. Presumably there is a formal contract between them, and surely that would include a clear allocation of responsibility for costs associated with the change.  If that was not included in the contract, then that represents both Bad Buying and Bad Selling, I would argue.

So the first of today’s two key learning points is this. A contract must detail the responsibilities that each party is expected to meet in order to uphold the legal agreement.  Now in very large or complex contracts, there might be some minor details that don’t get captured up front, but in particular, any activities that have an associated cost must be clearly laid out. Otherwise, there is a high probability of arguments later, as Wetherspoons and AB InBev have discovered.  I know this seems obvious, and yet there they are, in the high court.

The second case is both serious and quite amusing. Metal traders at Stratton Metals sold 24 tonnes of nickel to a German customer recently. Nickel is a valuable metal, increasingly used in batteries for electric cars, so much in demand. It is sold as briquettes, packed into 2-Tonne sacks. But when the customer took delivery and opened the sacks, they discovered that half contained worthless stones rather than nickel!

This was highly embarrassing for the London Metal Exchange (LME), which facilitated the contract and is Europe’s only remaining “open outcry” trading floor – rather than sitting in front of computer screens, traders literally shout at each other to arrive at buying and selling prices. The LME also operates through a network of 464 warehouses around the world which hold metals in stock, although LME does not own or manage these facilities. The dubious sacks were in a Rotterdam warehouse.    

Nickel seems to be a bit of a favourite for dodgy dealings at the moment. Last month, Trafigura, the Singapore-based commodities firm, took a hit of $577 million to its accounts when it discovered a huge fraud involving missing cargoes of nickel – although it is not clear that is linked to this recent stones substitution.  Trafigura is taking court action against Prateek Gupta, an Indian metals tycoon, over the missing metal.

Anyway, we might draw two wider procurement lessons from this. The first is very simple. Always check that you have been supplied with what you have paid for. Actually, that is not too difficult when it comes to physical metals – it is considerably more difficult when it comes to complex services, for instance. But the principle and the risk for the buyer is the same. You said you would provide this, I contracted to pay on that basis, and you have delivered something else.

Secondly, the nickel case shows that trust is still an important part of doing business. Despite the comments above about the importance of a robust contract, even a good example will not always protect you against corrupt, criminal or fraudulent behaviour. Trust does matter; so if you have a supplier you can trust, remember that is worth quite a lot. Nobody wants to find stones instead of nickel in their warehouse, literally or metaphorically.

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What’s In Store for Bad Buying in 2023?

As we enter 2023, what do the prospects for Bad Buying look like? No doubt, we will continue to see regular procurement and contract related fraud and corruption. It will be greeted on discovery by the CFO explaining that “it was a very sophisticated fraud”. Usually, that is simply not true.  What the CFO (or CPO) means is “our processes were rubbish and wide open to criminal exploitation, but I can’t say that because you might question why I’m paid a six or seven figure salary to manage this shambolic process”.

Talking of fraud, the long-running controversy over PPE procurement in the UK will continue in 2023, with an announcement this week that the government is going to court over the supply of gowns from supplier PPE Medpro. One paragraph in the Guardian report on this leapt out at me.

“The legal claim states that the DHSC had paid PPE Medpro the full £122m for the 25m gowns by 28 August 2020. This was before any of the gowns had been inspected in the UK, and before all the gowns had arrived. Health officials rejected the gowns after a first inspection at the NHS depot in Daventry on 11 September 2020”.

I know the situation was desperate back in 2020, but to pay the full contracted amount before inspecting the product at all – it just seems incredible that any procurement professional would agree to that. Anyway, more to come on PPE this year, no doubt with more discussion of links to politicians, dodgy suppliers and billions of wasted money.

Moving on from PPE, the public sector (in every country) will continue to struggle with complex and technologically complex procurement in areas such as Defence and major IT programmes. We can hope that the UK Ministry of Defence sorts out the long-running Ajax armoured vehicle fiasco, another programme with potentially billions of pounds on the line.  The latest comments in December during a House of Lords debate seemed a little more positive but let’s wait and see. It’s not just the UK of course. Just before Christmas, we saw reports in the German press and on the Jane’s website about some of their army’s vehicles following a major training exercise.

“Germany suspended procurement of the Puma infantry fighting vehicle (IFV) on 19 December after 18 of the vehicles broke down in an exercise preparing for their first assignment to the NATO Response Force Very High Readiness Joint Task Force (VJTF) in January, when Germany takes over command of the force”.

But the UK MOD seems to have issues with low tech procurement too. Recent reports suggest that the organisation still hasn’t got to grips with maintenance of military housing, a long-running example of Bad Buying on several counts. It started with a dreadful PFI programme that cost the taxpayer billions, and now the relatively new contract for looking after the homes is not delivering satisfactory outcomes for those who live there.  A contract management failure maybe?

Of course, it isn’t just the public sector that demonstrates Bad Buying, although the private sector is better at keeping failures hidden. I would argue that the professional services market (audit, consultancy, legal services) demonstrates a long-term failure of markets, procurement and buyers generally. Last month, the 100 Group, which represents the Finance Directors of some of the UK’s biggest firms, wrote to the “big four” audit firms to complain about rising fees. To which we might respond – well, you are the clients, why don’t you do something about it?

In truth, there is an oligopoly in the audit market. So the firms can get away with saying they are “investing in audit quality,” whilst in practice the extra revenue is channelled into paying their partners more and more each year – £1 million plus now in large firms. EY also increased the salaries of its junior accountants by 13% recently – nice for those people no doubt, but we all know that it is the clients who will pay for that generosity.

To some extent, legal service and strategy consulting has gone the same way – higher and higher salaries for firm’s partners in particular, whilst clients get exploited. Yet too many buyers are unwilling to use approaches that might mitigate cost increases, such as applying real competitive pressure, negotiating hard and skilfully, managing individual assignments more carefully, or looking at alternative suppliers to the top (and most expensive) firms.

Anyway, I’ll leave you with four thoughts for the New Year – maybe they could form the basis of some procurement new year resolutions for your organisation!

  • Check that you have everything in place to minimise the risk of fraud and corruption in your procurement activities. You can’t make it 100% criminal-proof, but you can make wrongdoing much more difficult by applying reasonably basic processes, systems and policies.
  • Competition is still the best mechanism invented to drive positive outcomes and outputs from suppliers and contracts. Use it well and widely.
  • Be a little cynical – well, maybe more than a little – about what suppliers promise you and the claims they make about their products and services, particularly in areas such as technology.
  • Organisations that are “good at procurement” don’t just focus on the skills and knowledge of their procurement teams – they understand that a wide range of people in the organisation need to understand their own role in the end-to-end process. They must also have the right commercial skills to play their part in procurement success.
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