Procurement Sees it First

Her account team turned over twice in twelve months. Implementation timelines slipped from six weeks to four months. The supplier's executive sponsor stopped showing up to QBRs. None of it was a fire on its own. Together it was the smoke. She filed the migration plan and waited.

Procurement sees supplier financial trouble months before it hits the news. We see scope creep before it shows up in the budget. We see contract drift in legacy agreements that nobody has revisited in years. Episode 4 made the case that savings is the wrong primary metric. This one makes the other half of that argument: the right capability is already sitting in the procurement function, the C-suite is paying for it, and in most organizations, it is not being used. For CFOs, CEOs, COOs, and board members who want a procurement function that gives them signals upstream of the variance, the announcement, and the renewal letter, not just after. Includes three early-warning saves and a four-part operating model for turning procurement from a sourcing function into a sensing function.

Primary audience tag: C-Suite (deeper)

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Website: https://procurexcellence.com 

Email: robert@procurexcellence.com 

Topics covered: vendor proposals, procurement rejection, discovery process, risk management, mission-driven purchasing, stakeholder alignment, supplier relationships

Transcript

SPEAKER_00 0:03

About two years ago, a peer of mine, a CPO at another nonprofit, called me on a Tuesday afternoon. She wanted to talk through a decision. Her organization was 18 months into a four-year contract with a software supplier. It was a mission critical platform, the kind of system that if it went away, would interrupt program delivery within a week. Renewal was still more than two years out, so by every conventional measure, this is not a relationship she needed to be thinking about. But she was thinking about it anyway. She walked me through what she had been seeing. Their account team had turned over twice in the last twelve months. Implementation timelines on the new modules had slipped from six weeks to four months. The supplier's legal team had stopped responding to red line questions within their usual cycle. And on the most recent quarterly business review, the executive sponsor on the supplier side did not attend, and the substitute they provided had not even been briefed. None of those things in isolation was a fire, but taken together, they were a clear signal. She asked me what I would do, and I told her what I would have done. I told her to start a parallel path, quietly, not a procurement event, not a public process, but a discovery conversation with one or two alternatives in the market, on the order of a few hours of her time and her CFO's time, to understand what an exit would actually look like should she need one. She did this and sixty days later had a working understanding of what the two viable alternatives were. She also understood migration cost and how long it would take to do. She did not act on any of this though, she filed it. Six months after our call, her supplier announced a restructuring. Three months after the restructuring announcement, the parent company filed for bankruptcy, and six months after the filing, the platform was sold to a private equity acquirer who promptly raised prices on all existing contracts by forty two percent on renewal. Her organization was the only nonprofit in the reference group that didn't pay that increase. They moved suppliers in 91 days. On a plan they had built quietly over 18 months, while every other organization in the space was scrambling. So I open with that story because it's the cleanest version of an argument I want to make to every C suite listener in this episode. Episode four of this show was called Savings as a Lie. It made the case that the metric most organizations use to evaluate procurement is structurally disconnected from how finance measures financial performance, and that it drives behavior the C suite would not endorse if it understood what it was paying for. This episode is the other side of that argument. If episode four was about what to stop measuring, this one is about what to start using. Because the most underutilized capability in most organizations is sitting in the procurement function. Not the sourcing capability or the negotiation capability, those are real, but the C suite already knows about them. The capability I'm talking about is sensing. Procurement sees things structurally before the rest of the organization does. We see supplier financial stress or trouble months before it hits the news. We see scope creep before it shows up in your budget. We see contract drift and legacy agreements that nobody in the requesting department has looked at since the day they were signed. We see pricing patterns in the market that tell us a renewal six months from now is going to be harder than the one we just closed. The C-suite is paying for that sensing capability today. It is built into procurement. In most organizations, it's not being used. The signals procurement picks up never reach the executive review. Why? Because the executive review is built around lagging financial indicators, not leading operational ones. So I want to walk you through three categories of early warning, with a story for each, and then describe what an operating model looks like if you actually want to use this capability, instead of paying for it and ignoring it. The first category is supplier financial trouble. The story I opened with is the cleanest example I can give you, and it is the one most C suite leaders underestimate. What procurement sees before the news cycle does is operational deterioration. The signals are not financial statements. We rarely have visibility to those, especially with privately held companies. The signals are behavioral, accounting turnover, slowing response cycles, implementation slippage, quarterly reviews that get downgraded or even canceled, changes in the payment terms that the supplier requests, particularly requests for accelerated payment that didn't exist before, senior personnel departures that show up in LinkedIn before anyone briefs you about them. A good procurement team watching the right suppliers will see those patterns ninety to one hundred and eighty days before the public market reacts. That window is the window. In ninety days, you cannot replace a mission critical supplier from cold start. In 180 days, with quiet planning, you can. Most organizations only learn their supplier is in trouble when the news breaks. And by then, the price increase is already baked into the renewal letter. The mitigation migration path has been mapped by every competitor in the space. You are negotiating on the back foot. The second category is scope creep. That has not shown up in the budget yet. A different story for this one. A finance leader I have known for years called me about a SaaS platform her organization had been running for three years. The base contract was four hundred thousand dollars annually. Her FPA team had built that number into the budget. It was a known quantity. What she couldn't figure out is why the actual cash going out the door to that supplier had climbed to $720,000 over the trailing 12 months, 80% above the budgeted contract value. The variants had been showing up gradually, line by line, never in a single quarter big enough to trigger a review. It was being explained each quarter, as one off additions, a module here, a user expansion there, a professional services engagement to support a new use case. I asked her if she had pulled the spend pattern as a single picture. She had not. So we did. What we found was that thirty-one separate change orders, none individually large, had been added to that contract over thirty six months. Each one had been approved by the requesting department, never escalated, never reviewed in aggregate. The supplier had been doing exactly what good suppliers do, solving problems for the customer in front of them. The customer had been doing exactly what stretched stakeholders do, solving the problem in front of them without looking at the cumulative pattern. The cumulative pattern was that the organization was now paying enterprise tier pricing on a series of mid-market change orders, when it could have negotiated an enterprise agreement two years earlier at a materially lower unit cost. Procurement saw the pattern in about three hours of analysis. The CFO had been seeing variants every quarter in accepting the one-off explanations because the one-off explanations were technically correct. They were just not the whole story. We restructured that contract over on the next renewal. Net result approximately $190,000 in annual cost reduction, locked in for 36 months, plus a new change order discipline that flagged any additions over $50,000 for joint procurement and finance review before signature. That scope creep accumulated over 36 months. It was visible from the procurement seat the whole time. Nobody was asked to look. The third category is contract drift in legacy agreements. This one almost never makes it to the C-suite, and it is the one I think the C-suite would care about the most if it understood what it was missing. By legacy agreements, I mean contracts that were signed years ago that auto-renew or evergreen, that are humming along in the background, and nobody has actively revisited them since the original signature. Every organization I have ever audited has them. There are facility services, print and document management, telecommunications, insurance brokerage, benefits brokerage, background screening, travel management. These categories were the original requirement was real, the original contract was reasonable, and then five years went by. I'll give you a sanitized version of one. An organization I worked with had a facility services agreement that had been signed nine years earlier, five-year initial term, automatically renewing for successive two-year periods, with an annual price increase tied to CPI. The agreement was performing, nobody was complaining, and there was no operational reason for anyone in the requesting department to even think about it. The market, however, for that service had compressed by roughly 22% over those nine years, partly because of consolidation in the supplier base, partly because of technology that had changed the labor model on the supplier side. The CPI escalators in the contract had carried the price in the opposite direction. By the time procurement had got around to looking at the agreement, the organization was paying roughly 38% above the current market rate for a service that had not materially changed in scope. We caught the next auto renewed trigger within 60 days to spare. We ran a competitive process, we recovered on the new three-year agreement, just over six hundred thousand dollars in annualized value relative to the previous trajectory. None of that would have been recovered if procurement had not flagged the renewal window, because nobody else in the organization was watching the contract. I want to be precise about what that recovery made possible. It was not a negotiation skill, it was not market expertise, it was the simple act of looking. The contract had been drifting for nine years because no procurement function had been resourced to systematically review legacy agreements in categories where the requesting department had no operational reason to revisit them. The C suite was not asking the question. If procurement sees things first, the obvious question is why the C suite is not benefiting from that. There's three structural reasons. The first reason is that procurement is engaged transactionally, not as the sensing function. Most procurement teams are organized around the next event, the next sourcing project, the pipeline, the next negotiation, the next renewal cycle in the system. There is no protected time in the operating model for the work that produces the early warning. Because early warning does not show up on a sourcing pipeline. It shows up in a phone call or in a one-page memo that didn't exist on Monday and does on Friday. If the functions is structured entirely around throughput, the sensing work is the first thing to get squeezed out. Not because anyone decided it was unimportant, but because the throughput work has deadlines, and the sensing work doesn't. The second reason is that the cadence is wrong. Most C suites engage procurement through an annual review and quarterly readouts. Early warning runs on a different clock. By the time the quarterly readout happens, the smoke I described in the opening story has already become a fire. The signal was real two months ago. Two months ago was the right time. Now there's not. The third reason is that the signals procurement picks up do not have a place in the executive review. There is no slot on the COO's monthly dashboard called supplier health. There's no line on the CFO's variance report called contract drift. And there's no section on the CEO's risk review called category level early warning. Those signals do exist, however. The reporting structure has no place to put them. So they sit in procurement's head and the executive team finds out when the news breaks. None of those problems are hard to fix. They are organizational design problems. They get solved by deciding to solve them. I want to give you a four-part operating model. This is what I have built into my own practice, and it's what I would build for any C-suite team that actually wanted to use procurement as a sensing function that it already is. The first part is a defined set of signal categories the procurement function actively monitors. In my own portfolio there are three supplier health, meaning behavioral and operational signals on the suppliers that matter the most. Scope and spend drift, meaning the cumulative pattern of change orders, expansions, and other additions against the original contract baseline. And contract and category drift, meaning legacy agreements and category level market shifts that have moved against the position originally negotiated. Three categories is the right number. More than that and the function loses focus. The second part is a defined cadence for surfacing those signals to the executive team. In my practice, the cadence is monthly. In a one-page memo to the COO that takes me about 90 minutes to produce, and that I owe whether or not there is anything urgent in it, the discipline of writing it monthly is what keeps the sensing function active. The months when the memo is short are the months when nothing is on fire, and that's a useful sign all on its own. And the third part is a defined escalation threshold. Not every signal goes to the C-suite. Most do not. Without one, every signal feels like it might be the important one, and the function defaults to flagging everything, which is the same as flagging nothing. My rule is straightforward. Any signal where the downside is greater than 5% of the contract value or 1% of the category spend, whichever is larger, gets surfaced. Everything else lives in the monthly memo. The fourth part, and this is the one that closes the loop with episode four, is a measurement structure that captures the value of the early warning as a distinct contribution. Not in the savings number, not in the cost avoidance, a separate line that says, Here are the saves attributable to procurement seeing at first, stated in dollars validated by finance, reported alongside hard savings and value as a third pillar of total called total value contribution. The fourth part matters because what does not get measured does not get protected. If you do not measure early warning, the throughput work will eat it every time. If you do measure it, the function will defend the time required to produce it, because the function will be able to point to the saves. Two episodes ago, I made the case that savings as a procurement traditionally measures it is the wrong primary metric. Today, I'm making the other half of that argument. The right capability is sitting in the procurement function. The C-suite is already paying for it, and in most organizations, it's not even being used. The procurement function organized around sensing, rather than only sourcing, produces a different conversation in the executive review. Instead of explaining a variance that's already happened, you're discussing a signal that's still upstream of the variance. Instead of reacting to a supplier announcement, you're deciding whether the parallel path you started six months ago is the path you want to commit to. Instead of finding out that the contract has drifted nine years past market, you are surfacing a drift at the moment it becomes economically meaningful. That's not magic, that's design. It is the difference between a procurement function that exists to process events and a procurement function that exists to give the C-suite earlier and better information about the parts of the operating environment that are most likely to surprise it. If you're a CFO or a CEO or a COO, listen to this. The question I want to leave you with is this one. When was the last time your procurement function gave you a signal that was upstream of the variance? The announcement, or the renewal letter. If the answer is never or I can't remember, that's not a procurement problem. That's an operating model problem. And it's the easiest one I know of to fix. This has been episode nine, the other side of the table. I'm Robert Brindle. Episode 10 takes us into a different audience entirely operations and finance leaders. On the question of what stewardship actually means when procurement and mission collide. I'll see you there.