How Adaptive Organisations Purchase Innovation
Decision makers are either bound by too many rules and constraints to do anything about legacy Procurement methods, or do not know how to approach the problem differently. But there has to be a better way.
by Sebastian Mueller, Chief Operating Officer at MING Labs
We previously elaborated on the shortcomings of the prevalent RFP approach for procuring services around innovation and digital transformation activities. In this follow-up piece, I identify certain pain points and processes that can be revised to improve the Purchasing process for innovation activities.
A digital transformation initiative usually involves work demanding a high degree of uncertainty. Embarking on a journey of doing something new or different often means making a fair amount of assumptions. Whether you want to redesign an existing process, create a new service offering, or improve cooperation with business partners, there are always gaps in your knowledge of what makes a good solution for the end user.
In many companies, the status quo is to define requirements by committee, involving several high-level stakeholders who are assumed to have a high enough degree of knowledge to create something useful. This backfires for several reasons, including the fact that the rationale behind the resulting requirements is often purely driven by business objectives instead of user objectives. Furthermore, the decision makers’ assumptions and knowledge can easily turn out to be incorrect or outdated.
Decision makers in organisations are aware of the problems that legacy Procurement methods cause. They know that these negatively impact the ability of Procurement managers inside of big corporations to support innovation efforts effectively. Yet, they are either bound by too many rules and constraints to do anything about it, or do not know how to approach the problem differently. But there has to be a better way.
“Nothing is quite so useless as doing with great efficiency what should not be done at all.”
— Peter Drucker
Rethinking Required Knowledge & KPIs
In order to procure a service, the first step is to understand what it is that has to be procured. That includes having the necessary knowledge and resources needed, the desired outcomes, the process and the reasons for doing it in the first place. A certain degree of subject matter expertise is required to restructure the process in a way that actually makes sense and leads to superior results for all involved.
When seeking to understand why traditional purchasing routines no longer work for Digital Transformation efforts, it is helpful to first examine the problem of friction between both the external and internal parties involved. This includes the Purchasing representative, the service providers who wish to do business with the company, as well as the team member looking to procure the service to get results. We often find that friction is caused between the intrapreneur and potential partners, where they become frustrated by the lack of knowledge and lopsided focus on short-term thinking that informs the Purchasing department’s KPIs.
In our experience, Purchasing representatives are often seen as the adversary, both by the service providers who wish to do business with the company, as well as by the team member looking to procure the service to get results. The purchasing process is often very time-consuming, one that is further exacerbated by the IT systems in use, and together with interdepartmental friction, creates shared frustration between all three parties involved. At the same time, we know that many Purchasing managers prefer to be seen as value-adding business partners. A common desire we see is that they want to contribute by adding value to the organization, rather than only looking to cut cost on every purchase by the required 5–10% as per their KPIs.
It is important that the leadership rethink the KPIs they are setting for certain parts of the Purchasing process. Purchasing managers also need the time and resources to regularly educate themselves about the subject matter they are seeking a solution for. When aware of the subject matter, and when decoupled from cost-driven KPIs, they have the opportunity to be more proactive. They can contact the right potential partners and have informed discussions with them to create win-win setups in their company’s best interests.
Process-Driven Procurement for Innovation Services
One of the hallmarks of all innovation and transformation projects is that they are carried out with imperfect knowledge, and hence involve high degrees of uncertainty and risk. One formal approach designed to mitigate these is the “Lean Startup” methodology. It may sound like it should only apply to scrappy upstarts in their proverbial garage, yet in his latest book, The Startup Way, Eric Ries shows how an agile approach is applicable even to the largest enterprises around today.
Such a methodology focuses on user needs, recommends carrying out early and cheap experimentation, as well as conducting quick iterations at each stage. These points are exactly what good design processes have already been about for a long time. However, a lean startup approach applies these principles throughout the entire undertaking, instead of only focusing on them during the design phase. This is accompanied by the concept of “Metered Funding”, where an initiative receives incremental amounts of guaranteed funding that only become due with the achievement of agreed milestones, and are only granted based on the next set of milestones that the funding will help to achieve. Those milestones are usually tied to validated learning, which basically means running experiments to turn assumptions into knowledge.
When applying a process like this, it would be unreasonable to:
- Attempt to procure the whole solution in one go
- Try to get a fixed budget number for the complete initiative up front
- Award work focused on price instead of aligned milestones
Instead, the overall initiative can only procure whatever service scope is feasible and necessary at their current knowledge and funding stage. The person responsible for the initiative needs to have guaranteed funding that they can spend as they see fit at each leg of the effort. They can only get more if they achieve their agreed milestones and learning. Under such a framework, the responsibility of managing the numbers clearly sits with the intrapreneur. She can only be held accountable for outcomes she is truly in control of.
Within these boundaries, Procurement has the chance to act as a value-added business partner by supporting the intrapreneur. This includes sharing general best practices of engagement, as well as providing an overview of the market of services they are looking to procure and by making recommendations. This is a role they can only achieve if they have the time to survey the market and see themselves as an internal service provider to support an intrapreneur.
Services that might need to be procured, depending on internal capabilities, include
- Discovery (Understanding and mapping the problem, the potential users, the surrounding landscape; ormalizing findings in frameworks as a living documentation)
- Experimentation (Creation of prototypes; conducting of user tests; analysis and summary of user tests)
- Execution (Creation of work product under certain feasible process frameworks, such as Agile, suited for the needs of the job)
- Support (Analytics, ongoing maintenance, regular updates, further experimentation and tweaks)
Developing Innovation-Friendly KPIs
As the intrapreneur is in charge of making the numbers work for her initiative and is being held accountable, the exercise of Purchasing can no longer be controlled based on pricing-related KPIs. Procuring innovation or transformation services requires a focus on the actual outcomes for the company. This includes making sure that intrapreneurs have the support platform they need to really move the needle with their initiatives and bring the organization forward.
At the same time, focusing on the actual outcomes with these kinds of engagements is seriously challenging. Failure comes inherently with the territory. Holding the intrapreneur accountable is difficult, but can become more achievable with a shift in focus towards agreed leading indicators, milestones, and other new ways of innovation accounting. Procurement should be focused on serving their internal users well. They have to understand their needs and knowledge gaps, and see themselves as valuable service providers to their colleagues, aggregating important support functions they will need to assist with.
As such, a focus on qualitative internal feedback is indispensable. Quantitative approaches could include service factors such as response time (internal and external), turnaround time (from internal request to a PO, or on a contract basis) and similar indicators. Focusing on the needs of their internal and external customers, being proactive, being quality-oriented and embracing a service mindset can help Procurement managers to excel under this new paradigm and to truly add value to their organization.
In environments with high degrees of certainty, such as the procurement of production materials for the supply chain of an existing product, a focus on cost is reasonable, as it is easy to be certain what the correct solution is, and every qualified solution can then be compared on how economical the choice is for the company.
In environments with high degrees of uncertainty, such as when engaging in innovation or transformation activities, the focus needs to be on procuring the services of the smartest people who can truly help to solve the challenges at hand. This requires understanding of the subject matter, and a focus on quality over cost.
The KPIs of the Purchasing department need to reflect those conditions appropriately, or the money spent will be money wasted, which is worse than paying a little more than average for the right solution.
Start with Small Experiments
In a business environment of increasing uncertainty and a demand for continuous innovation and transformation, all parts of the organization need to reinvent themselves accordingly. Companies cannot tackle every challenge alone, and as a strong network of competent and trusted partners is becoming increasingly important, the role of Procurement needs to shift as well. In today’s service economy, the right partners enable organisations the critical ability to build, scale and improve on their offerings.
The required mindset shift for Procurement departments is one that needs to move away from being a primary gatekeeper and cost controller and towards being a value-added business partner for intrapreneurs to secure the resources they need to succeed. As the top service providers are highly sought after, staying up-to-date with the landscape and securing access to the best will become key for a company to be able to compete at the highest level. Purchasing now has a new strategic role to play in securing that kind of access, and in providing comprehensive services to the intrapreneur, Purchasing can empower them to engage external partners in the best way possible and create real value for the organization.
Companies that fail to realize how harmful current Procurement practices are when blindly applied to innovation and transformation efforts will soon lose access to the best partners in the ecosystem. With increasing dependence on outside support, they will find themselves in a tough spot, as their own front line blocks the necessary supply instead of strategically securing it.
In making the necessary shifts, companies can start with small-scale experiments for single units or projects, to see how a service-driven Procurement mindset could work and add value. Consulting valued partners can help organisations to understand the perspective of the external customer, while internal customers are usually more than happy to air their grievances.
By working with internal stakeholders to define expectations and new ways of working, companies can reimagine how they engage partners and how they incentivise their Procurement representatives to focus on quality and solutions, instead of quantity and cost. When moving to secure the future of your organisation, it helps to remember that every successful Digital Transformation starts with the transformation of purchasing itself.
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Sebastian Mueller is Chief Operating Officer at MING Labs.
MING Labs is a leading digital business builder located in Berlin, Munich, New York City, Shanghai and Singapore. We guide clients in designing their businesses for the future, ensuring they are leaders in the field of innovation.
