Talking Point: Corporate procurement

Corporate procurement got a lashing from two different speakers at a recent life sciences conference in London. One speaker from a major pharmaceutical company told the story of an electronic data capture project for which he was the business sponsor and leader. The company had finalized software selection and then involved corporate procurement in the contract negotiations.

The result: a 40% reduction in software licences on this major deal. But their involvement turned out to be entirely disruptive to the project. First of all, the negotiations dragged out for a whole year. Second, not long after, the small software company went out of business — a result that was, at least, partly a consequence of the delayed payments and lower prices. This soon left the pharmaceutical company with a core business system with no support and no future.

Another speaker, managing clinical development functions, told about a similar project where procurement had succeeded in getting the software licences and consulting rates down to cut-throat rates. A job well done, you would think. However, from his perspective as programme manager responsible for the business results, it was a disaster. After considerable delay, once the deal was signed, the team that showed up from the provider was their C-team. Not the A-team. Not the B-team. But the C-team of the most inexperienced new hires available. This was the only way for the provider to stay profitable on the deal.

This is not the first time I have heard of such procurement horror stories. But rarely do high ranking business representatives launch into such direct and public criticism of another company's function.

The art of negotiation

I wonder whether the criticism has been heard in procurement — and whether any changes have been made. If not, here are some points to consider for those involved in negotiating software and consulting contracts:

Measuring procurement people on cost reduction might lead to a classic case of dysfunctional behaviour. Similar the old story about the nail factory — if the factory's performance was measured on the number of nails produced, it would make millions of tiny (useless) nails. If the measure was the weight of nails produced, they would make really big (useless) nails. The role of corporate procurement should not be to minimize the price, but to maximize the net value of the project. Look at the business case for the project — it will be easy to calculate the cost of a 1-month delay. (If delaying the project has little consequence then you should probably not run the project in the first place).

If you pay peanuts you get monkeys. Human resources managers know that you have to pay higher salaries to attract and retain the best. Business leaders know that one outstanding performer can deliver manifold the results of those less skilled, experienced, energetic and results-orientated. In some cases the output ratio is infinite — only a strong profile will be able to pull it through — with others the project will simply fail altogether. Think about this nonlinear relationship when negotiating. It's probably far more important to get the right people on board than getting the wrong ones for 20% less.

Consider driving the deal towards win–win conditions, rather than predator–prey. No matter what, you are going to depend on that vendor. You are going to invest in training, documentation and integration that will tie you to them. So at least for major deals, it might be time well spent if you got to know the company's management, got them to appreciate your business drivers and to commit with their heart and soul. That is more about social engineering than legal clause gymnastics. Sometimes, it's a tougher foundation for your project — ensuring your endeavour can withstand hurricane-strength organizational winds.

Philip Skou is vice president of NNIT, Switzerland.