Exclusive Q&A with Stephen Daw, Vice President of Group Procurement - Americas at International Airlines Group (IAG).
With Carillion’s issues potentially being just the tip of the iceberg, procurement leaders need to ask themselves serious questions about deals that look too good to be true or seem unsustainable. If the Carillion example shows us anything about the contracting process, it is that any organisations can fall into the trap of “easy purchasing”.
This type of procurement approach often ignores wider risk, downplays the role of quality, focuses on easy to measure savings and often results in the extension of business to so called ‘trusted partners’. In a world where procurement professionals increasingly need to deliver more, but with less resources and demonstrate bottom line improvement, the temptation of “easy procurement” is obvious.
Managing a company’s culture to avoid “easy purchasing” is the best way to de-risk procurement activity. However, this is a long-term project. So, what do you do when your next confronted with a deal that looks too good to be true or you suspect the deal is unsustainable?
Stephen has with over 15 years senior management experience leading and supporting operational, commercial and procurement teams. So, who better to speak to for an expert opinion?
Stephen, what advice would you give to procurement teams, dealing with this kind of situation?
My advice when placed in this tricky situation would be to:
Many RFP’s (request for proposals) or selection processes start with credit reference agency checks, but this is only the beginning. Procurement leaders need to ensure that they, and their teams, push to identify risk in new and existing deals. Low bids, errors and omissions in RFP submissions and costs, pricing and spec that do not match industry benchmarks are all high-risk flags. Procurement needs to get to the bottom of these issues to de-risk purchases. Obviously, this needs to be done selectively as value may be lost in the short term when pointing out issues to suppliers. In the long run, however, this approach will strengthen relationships and will avoid on-boarding high-risk providers. Overall, if you find yourself walking away from a deal and wondering how someone can deliver at the price quoted, it is time to go back and ask more questions.
Own the risk but manage it with service/product users
After going deeper, if you feel there is still a risk, ask yourself can you really afford to take potentially unsustainable business? If the answer is yes then you need to own and manage the risk, but do this in partnership with the wider business, who need to be aware of potential issues. Unsustainable deals frequently lead to quality and performance issues as suppliers seek to reduce costs to make up any shortfalls. Procurement and service users need to monitor activity relating to deals like this extremely carefully and strictly enforce contractual provisions designed to deliver quality services.
Develop an agreed strategy to manage potentially unsustainable companies
Whilst managing the risk of an unsustainable deal is possible, managing the risk of contracting vast swathes of work to an unsustainable company is not. In the case of Carillion, it is telling that some vigilant organisations set up a range of safeguards, well before the company was publicly acknowledged as being in distress. These safeguards ranged from halting new business with the provider, diversifying the supplier base and developing in sourcing options. What seems to be common in these examples is that senior business and procurement leaders had understood the risk and agreed this strategy. On this basis, procurement leaders need to focus on understanding director level risk appetite and raising awareness of current supplier risk. After this, the trickier work of agreeing a joint mitigation approach when a supplier exceeds desirable levels can be pursued.
Avoiding “easy purchasing” is a constant battle but procurement leaders who take the steps above at the very least will ensure their companies are risk aware and understand mitigation options.
Find out more about Stephen, here.
Stephen is a current Procurement VP working for International Airlines Group and has over 15 years senior management experience leading and supporting operational, commercial and procurement teams.
He is passionate about delivering sustainable change and has extensive experience of delivering service excellence, profitability increases and cost reduction outcomes by carefully focusing on strengthening a business’s strategies, processes, people and culture.
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