Playing To Win
Do You Know What’s Going on Below?
Procurement Gone Rogue
Rogue procurement activities are becoming ever more institutionalized and have damaging consequences for companies. I have made this challenge the topic of my 20th Year III Playing to Win Practitioner Insights (PTW/PI) piece called Do You Know What’s Going on Below: Procurement Gone Rogue. You can find the previous 130 PTW/PI here.
A Rotman Cautionary Tale
I served as Dean of the Rotman School Dean for 15 years, and fortunately it was considered a very successful tenure. I was surrounded by great colleagues, to whom I gave high levels of responsibility, which helped make our excellent performance possible. So, what I say below is not a broad-based complaint. It is more in the category of an exception that proves the rule. And that rule is: it’s hard as hell for those at the top to really know what is going on in the middle of any sizable organization!
We expanded enrolment at Rotman dramatically during my time as Dean and the centerpiece was tripling the size of the flagship fulltime MBA program. As with most MBA programs, lots of work during a Rotman MBA’s first year is done formally in study groups. As enrolment expansion squeezed room in our existing building, study room space became a huge bone of contention. We had a relatively small number of rooms, and they got booked up quickly for every hour of the day by study groups — and those who couldn’t get access to a room when they needed one got angry — both at administration and at the groups viewed as hogging the time.
Fortunately, a great debottlenecking was on the way — our new building adjacent to the existing one, which would more than double our square footage. I saw the ability to completely transform the study group workspace situation. Rather than having to go through the process of signing up for space and not knowing if it was going to be available, and if so, when and where it would be, each study group would be assigned an exclusive room for the year. They would have it for themselves, with their own key, to use as they please, leave books/materials/work there, bring in a cooler — whatever. I felt it would be transformative to the student experience. While I was the strongest proponent of this solution, no one on the whole design team protested.
At a certain point in the architectural design and planning process, I left the work with the architectural firm and the two very senior members of the Rotman team leading the work to make sure it happened along with everything else in the architectural plan. At some considerably later point, the team sent me the final plans that had gone out for bids to the various contractors and subcontractors. I took the time to look through them and quickly got a sinking feeling: we looked short on first year study group rooms. I counted them up and sure enough, we were about 20% short. I called in my two senior colleagues in to inquire and got the sheepish explanation that they had to cut them because there were competing demands for space.
And of course, by this time, it would have taken many months of project delay and millions of dollars in change orders to redo. Sadly, the approach was destroyed. The student experience dropped from ‘it’s yours for the year’ back to ‘rooms are available to be booked.’ And since the room were no longer special at all, I predicted that we would have too many — which we ended up being the case — sigh.
It was lesson learned for this erstwhile Dean: it’s hard as hell to know exactly what is going on in the bowels of the organization, even when you think you do.
Procurement: The Classical Modern Case
The place where I see this play out most frequently in the modern business world is in corporate procurement. I have been noticing how procurement groups undermine the strategies of companies without their senior executives being aware of the things they are doing. And most of the time, when I point out what their procurement people are really doing, they don’t believe me.
But recently the point was truly driven home for me when I began work with a huge Fortune 50 company. So, it was very little RLMI and very big client. Usually someone else at RLMI gets us through the client procurement gates and I usually don’t need to get involved — though I have a deep appreciation that a lot of the work is torturous.
But on this one I had to get involved because an ethical issue arose, among other ‘fun and games.’ As is often the case these days, the entire process was outsourced by the giant client to a giant Vendor Management Services (VMS) company, which touts its ‘high-touch service’ — an irony to be sure.
Embedded in the first list of required documentation from the VMS was three invoices that we had recently issued to other clients. That is when my team came to me flabbergasted — thankfully asking, we can’t do that, can we? I went back to ask whether we misunderstood because they could not have possibly meant that we needed to send to the VMS confidential information from other clients — i.e., actual invoices with details of services rendered, timing, and costs of the service. We were stunned by the response, which was to wonder why we found it such a big deal.
Let’s think through the implications of this. If we were to acquiesce to this request without getting the permission of the three other clients to share their confidential business information with a third party, we would be liable to be sued — and rightfully so for such an indefensibly egregious act. To acquiesce without engaging in both immoral and illegal acts, we would have had to go to the legal departments of three clients and ask for the permission to forward an invoice between the two of us to this new client. Everyone knows I have had a long association with P&G, so I will use the company as an example. Imagine me going to P&G to get that permission. The probability of success would be zero. Not 1%, not 0.1%, not 0.01%; zero.
Since any fool would know that to be the case, the VMS, on behalf of my client, was asking us to share invoices behind the back of other clients.
This goes back to a fundamental Golden Rule question, which I have written about before this series: Was this client doing something to us (and our other clients) that this client would be happy to have been done to them? More particularly, would this Fortune 50 company want me to share its invoices with third parties without its permission? Of course not, they would sue the pants off me — justifiably. Yet they have put in the hands of their VMS supplier the power to do just that.
And the abuse just kept coming. They insisted on RLMI agreeing to be governed by an online Master Service Agreement that the client can subsequently change in whatever way it so chooses. Would this Fortune 50 company agree to completely open-ended terms and conditions if that was requested of them? I will stop here but I could keep going, and going, and going.
We had developed a terrific working relationship with the folks at the client with whom we directly worked on the engagement and were excited about the work together. But it is really hard to ignore the fact that the client organization is willing to enforce an abusive and immoral procurement regime on its suppliers. We refused to comply, and the matter was escalated to a sufficiently high level that the VMS functionairies were told to back off. But it left a lasting bad taste in the mouth. It is no longer the same relationship.
I have seen enough of this across many clients and their suppliers to know that the pendulum on procurement has swung too far, as I have argued before in this series. During the 1960–2000 period, procurement was too lax. Since then, it has gotten tighter and tighter, until the present when it has gone right over the edge.
The most general point is that you need to penetrate farther than you think you should. I should have done that at Rotman. So, I empathize with the senior executive of this Fortune 50 company: it is not easy. But senior executives have to understand that while it is all well and good to give your procurement organization or outsource VMS provider ‘aggressive cost reduction targets’ and/or insist that they ‘fully protect the company’s interests,’ it is not okay to fail to ask, just how are they going about doing it?
The way to conceptualize the penetration is as anomaly detection. If you see one cockroach, there are 1000 more in hiding. Pay attention to very weak unexpected signals.
When it comes to procurement, especially if you have outsourced to a VMS platform, you need to penetrate more thoroughly. My bet is that you have little idea what they are actually doing to your entire supplier base. And when you figure it out: fix it.
This case got escalated. But I do not know whether senior leadership went back to the VMS platform to demand that it cease and desist requiring submission of third-party confidential information. I would have hoped they would have done so for moral reasons. But if not, there is an important legal reason. Imagine an equally gigantic company, BigCo, finding out that the client forced one of its vendors to send BigCo’s private, confidential information to it. Sure, the now furious BigCo would sue the vendor. But then BigCo would come knocking at the door of the deep pockets — and if it can demonstrate that the pressure on the vendor was so great that the vendor cracked under it, the judge is going to look at the deep pockets behind this violation.
Always go back to the Golden Rule. It will provide good guidance for you. For example, it may sound good at first when your finance folks tell you that they have enforced a working capital target that maintains average payables aging at (say) 15 days longer than average receivables aging. You may think: Awesome, that will save working capital. But it is institutionalized bullying. It is doing to others precisely what you would never, ever want done to you. Otherwise, you would set your own receivables target at fifteen days longer than payables.
Penetrate to understand where your company is doing things that you wish were not happening. And when you find such things, always take the time to explain why you wish they weren’t happening so that those involved can learn and improve. Otherwise, you risk rotting the soul of your company.