Procurement’s future lies in exchanges, not monoliths
First published 8th July 2015
A cursory glance at modern business confirms that there is growing demand for flexibility and decentralisation. We live in an intensely competitive environment where two people in a bedroom can raise millions of dollars in funding while a company worth billions can be eclipsed in a matter of few months. Business is undoubtedly becoming more fluid and dynamic, so the purchasing profession needs to adapt to match.
A recent article theguardian.com/public-leaders-network/2015/jul/02/public-sector-could-save-billions-without-cutting-frontline-services outlines how Government can save money by aggregating spending into big, long-term, centrally managed contracts. However, this approach is likely to push more and more business to the handful of large suppliers that have been servicing the public sector for decades, even though many of the previous contracts with these suppliers have not delivered on the savings promised. Understandably, procurement professionals need the lower prices achievable through aggregation, but the quoted price and true cost savings can have a frustratingly divergent relationship once a long-term contract is signed, especially with suppliers adept at managing those contracts to their own advantage.
In truth, this long-term, monolithic approach to procurement actually stifles competition, smothering dynamic and fast-changing markets with long contracts that go to suppliers who can bid better than their rivals but not necessarily deliver better to their customers. This is just one reason why the government’s GCloud initiative is so vital, as it is a significant step towards an open exchange and has, according to GDS, saved government £120m computerweekly.com/news/2240218888/G-Cloud-chief-claims-120m-savings-so-far.
Real savings come from competition, and true competition exists in open exchanges, where unit prices are known and demand is transparent to everyone. In an exchange buyers are allowed to move between suppliers trade-by-trade, minute-by-minute, rewarding suppliers that offer the best price.
Obviously, this approach works well for commodities such as crude oil, coffee or electricity, but one could assume that it is less suitable for complex services such as waste or social care. However, that isn’t necessarily true. Businesses like Uber uber.com, AirBnB airbnb.co.uk and Amazon amazon.co.uk prove that complex services can be commoditised. They are not suppliers in the normal sense, but are much more like exchanges, allowing multiple suppliers to access customers through their platform, which means that they owe much more to businesses like the NASDAQ than they do to a normal taxi or hotel brokerage.
If you think this model can’t work for waste or social care, think again. Care staff are routinely booked through intermediaries such as Comensura comensura.com and waste could be the next industry to be disrupted; Rubicon Global rubiconglobal.com has built a platform to allow individual households to organise and pay for their own waste processing and collection. The secret to these exchanges is standardisation, which gives both the buyer and the supplier the confidence that they will receive a product or service of a required standard.
So to fit in with modern business, procurers, especially government procurers, should think more about how to standardise demand and increase competition instead of working to aggregate demand into larger and larger monolithic contracts with fewer and fewer suppliers. The future is more diverse, more agile and full of risk, but the greatest prize will go to those who can adapt to the opportunities it presents.
Originally published at spendnetwork.github.io.