Sunday, October 9, 2011

Procurement Diligence Pays Dividends - Part 2

Requirements planning is a key first step.  It is important to be forward leaning, anticipating organizational and key customer requirements ahead of initial requests.  This proactive behavior is built upon two foundations; relationships that enable anecdotal and hard data information sharing as needs first begin to emerge (long before they are normally translated into a requirements request), and strategic alignment of the FM operation with enterprise goals and activities.  Having the advantage of these two perspectives allows the FM leader to forecast properly and bring creative contributions to bear.  Importantly, requirements planning improves the quality of investments made, thereby contributing to capital preservation which in turn improves leverage.  Optimizing the requirement minimizes unproductive expenses and helps optimize the supply chain, both of which improve the overall value of any given requirement.
The specification process establishes criteria for successful outcomes.  Whether you are looking for a new robotic manufacturing system, land for a new headquarters building, a new maintenance or service provider, or an improved contract for office supplies; the specification you approve establishes your expectation of what is acceptable.  As such it warrants diligence and serious consideration.  You may consider the specification to be the floor against which you will evaluate options, whereas providers may consider it the ceiling as well.  This is an important distinction and demands clear articulation in the resulting specification.  Further, the specification process should include in collaboration and consensus among the full range of stakeholders for any important product or service.

Market assessments inform acquisition strategies.  Consider the assessment as your opportunity to understand the full breadth of requirement fulfillment options.  A formal and standardized assessment will yield market forecasts for any product or service, including relative competitive alignment among providers, their strengths and weaknesses, and how well their offerings align with your needs.  Do not under appreciate cultural alignment as a learning outcome of this effort, especially if the products or services you will procure from them are of strategic importance.  It is often valuable for the internal team that has conducted the assessment to come together at the back end and share individual learnings and questions.  What can we do different than we normally do?  What is now possible that we didn’t realize when we started this process?  These are important questions that should be answered and provide feedback to the requirements and specifications processes.
Investigation should include analysis of metrics that predict likelihood of instability.  This type of investigation looks at performance quantification in areas that highlight unstable operations or high risk potential.  Think of this as identifying and then quantifying Key Performance Indicators (KPI’s) for a provider’s overall business.  If dealing with a commodities contract for example, one might evaluate the supplier’s performance against their production plan, the number of delayed shipments, the volume of product returns, how often the supplier must be expedited, and how accurate their marketing forecast is.  This information will tell you how accurate their internal business processes are and where there may be hidden stress in their systems.  If the contract you are considering is of high strategic importance to your own operations then these information points are especially important.  These are not the kinds of questions FM’s normally ask in a sourcing exercise but they can be illuminating, revealing hidden risks that no marketing department or account representative is going to share.
FM’s spend a lot of money, one reason why the function was traditionally thought of primarily as an expense line item in the purest form.  The profession has increased its sophistication and strategic visibility largely because it is now recognized as a valuable contributor to corporate direction and health. Attention to detail has always been a hallmark of the FM activity and that is not changing as the profession elevates its profile.  It is, in fact, because we have been successful in marrying the boiler room with the board room that we have been able to achieve this.  Both elements are critical in our evolution.  The kind of diligence and rigor toward the purchasing activity so important to the FM and suggested here is the same diligence that drives our increasing recognition as a value add function. 

Strategy and goals are one thing, execution is everything.

Tuesday, October 4, 2011

With a Nod to Top Gear...No One Should Have This Much Fun

I'm not sure if this post is about fast cars, sightseeing in Abu Dhabi, or just wondering what $1.3M could buy. Doesn't matter does it? It's definitely not about work!

Monday, October 3, 2011

Procurement Diligence Pays Dividends

In today’s business world it is important that FM’s get the maximum value for investment while minimizing risk.  Being a smart customer is a good way to improve both domains.  Many of the business partners you depend upon daily remain under economic duress, which may affect their ability to perform successfully.  When the video store on the corner closes its doors it’s an inconvenience, when your outsourced maintenance provider or sub-leased tenant goes dark it’s a whole different issue.

An informed customer has a much greater probability of making smart decisions.  I am sure you do a lot of research when you prepare for a major personal purchase, such as a car.  You investigate quality and true cost of ownership, and read reviews from experts and other owners.  It is only when you feel fully informed and armed with the best information that you proceed to the dealer’s lot.  Making a major business purchase is no different – information is king. 

Who does the research is also important.  Abdicating this responsibility to your Purchasing group is not a good strategy.  You know the industries, issues and players.  You are prepared to ask telling questions that will reveal a potential partner’s true viability.  And it is you to whom leadership will look should a business partner’s performance jeopardize your operation because they are cutting corners or have failed.

Basic investigation should include a comprehensive evaluation of financial health and risk.  If a major financial or mission dependent decision is at hand then rigorous investigation is needed.  This should include a review of financial health including how well the company is capitalized, a review of their stock price history, independent conversations with clients of your choosing (ask for a full list and make your own judgment on who to call – don’t just call the three or four they recommend), and a SWOT analysis to understand their market vulnerabilities.  At the bottom line it’s about the bottom line.  Capital is the lifeblood of business.  Make sure they have it and know how to use it wisely.

Take advantage of leverage but maintain balance.  There are lots of ways to gain pricing advantage when dealing in a buyer’s market, but it is possible to damage future performance and the relationship by being too aggressive.  Unsustainable terms may look good now but can cause the provider to fail if they are not able to support operations in an acceptable manner due to cost pressures.  While you are busy figuring out how to get the best possible deal, turn the coin over and consider what provides the best possible value.  Aggressive but fair economics combined with performance measurements and penalities/incentives that compensate the provider based on true value enhancements to the customer will help set a win-win environment.

It’s all in the contract.  All the good intentions in the world aside, it is the contract that rules.  For important commitments contract negotiation should be an FM responsibility with Purchasing and Legal in a support role.  It is fair to include penalties and often it is smart to include incentives, as mentioned above.  Importantly, however, there must be a basis for understanding and interpreting performance in a way that minimizes ambiguity.  Performance data, metrics, SLA’s and KPI’s offer essential legal protection but must be well thought out and agreed to, as should the processes for collecting and reporting.  Another key clause is the right to re-bid and/or renegotiate the contract at any point at the customer’s sole discretion, with an appropriate notification period.  This will allow you to take advantage of economic shifts in the customer’s favor should they occur mid-cycle before you would normally have a chance to re-compete, or to replace the provider should performance fail to meet requirements.