Author: Jonathan Dutton FCIPS
When it comes to contract management and delivering sustainable, world-class procurement outcomes, Australia is defined by specific challenges.
Why is Australia different? This is one of the most difficult questions I have faced over a 30-year career in business management working on both sides of the negotiating table and at both ends of the world. Having spent roughly half my career working in the UK and half in Australia, and done business in many countries, I might be expected to have a ready view on key differences. Yet these proved surprisingly difficult to define because Australia is not unique and every country has challenges.
We know Australians always aspire to matching the rest of the world when it comes to business processes and standards – despite being challenged by our geographic isolation and its many complications.
Yet when it comes to contract management and delivering sustainable, world class, supply side outcomes, Australia is defined by specific challenges beyond the growing volatility and complexity of the global business environment.
I believe procurement and contract management in Australia and New Zealand is broadly differentiated by these six key challenges, all of which can impact on our ability to deliver optimal outcomes:
- Vulnerable supply chains – more risk
Australia’s geographic isolation from the rest of the world puts us at the very tip of the global supply chain. These supply chains can easily become stretched, leading to real vulnerability and increased risk. Also, as our supply lines become leaner and more efficient, our risk increases – “the fragility of perfection” as described this trend, just before the GFC in May 2008. The valid question was posed: “Maybe our supply lines need to be more robust in the future, in the face of growing volatility and complexity?”
We certainly need to be proactive in managing the risk profile on the supply side, to ensure delivery of vital goods or strategic projects. Our contracts need hands-on management from beginning to end, with less reliance on the Australian adage, “she’ll be right”. The “tyranny of distance” alone suggests that global supply chain disruption is almost inevitable. The exact cause is less relevant than the need to have a viable Plan B for your strategic supply lines in to Australasia.
- A smaller marketplace – fewer suppliers
In global terms, Australia is a small marketplace. It is also a disparate market – “five cities on a big desert island” as we have been described. So, five small markets spread across a continent. Although we demand first-world standards and quality, our limited market means there are fewer suppliers to source quality solutions from. Typically, buyers face an oligopoly, or even worse, a duopoly.
What does this mean? It means we should invest in developing stronger relationships with suppliers. There is not the number of suppliers in our smaller marketplace to be able to burn bridges in the same way that larger and more competitive environments can accommodate a more market-orientated approach.
Continually going to tender is not a sustainable acquisition strategy in smaller markets; and tendering cannot remain the default procurement strategy if we seek optimal outcomes in the longer run. Instead, we need much stronger supplier relationship management (SRM). This will help ensure greater certainty of supply and keep more suppliers interested in delivering the quality outcomes we require. Good contract management is the essential first step to being able to free up the time to invest properly in SRM.
- The demand for higher standards – closely policed
Australians demand the highest standards and we’re increasingly willing to pay more for it. Whether it’s paying higher taxes or being prepared to accept slightly lower shareholder returns to ensure a more sustainable or “greener” approach, or just paying a little extra as a consumer for a cleaner conscience that fair wages are paid to developing world workers – we’ll often do it. We want things better, faster, cheaper, greener and safer. In procurement terms, tighter processes and greater due diligence are both necessary to attain Australia’s rigorous compliance standards (that are increasingly well policed) and growing ever more stringent.
This is all well and good, but when it comes to applying best practice contract management to stay on top of the bureaucracy and multi-layered quality control demands, Australian procurement teams often fall short. They simply do not have the time, the resources, the systems, the data, nor the support to do this job well along multi-layered supply chain tiers. This disconnect between consumer preference and government or corporate policies and inbound supply chain management standards will become more obvious as examples of slip-ups inevitably proliferate.
Turning a blind-eye to supply chain compromises will be less and less acceptable in future. More supply side resources are inevitable. One solution is to invest in contract management and procurement automation. Contract management covers administrative, legal, contractual and compliance requirements more comprehensively and more efficiently but – crucially – saves buyers’ valuable time to allow them to take a more strategic and targeted approach to areas of risk and vulnerability on their supply side.
- Reluctant global suppliers – that we need to sell
A local sales expert and consultant in Melbourne trades on the tagline: “we all live by selling something.” Yet “sales” skills in the procurement profession are too rare. Why should world-class vendors based in high density markets such as the US and Europe bother to supply low volume small markets at the other end of the planet – with all their attendant risks, costs and service needs diluting margins?
Ultimately, as the consequence of being a smaller and more remote marketplace (the first two points above) with a real desire for world-class solutions (the third point), buyers “down under” will increasingly have to “sell” the idea of supplying us to powerful overseas vendors.
Australia is often a low-volume and far-away customer. But we are a smart client, technologically enabled, a great beta site and we have a stream of fast-following countries in our region for which we can be an excellent base to reach more new markets. We are also well resourced, easy to do business with, affluent and can pay on time in hard currency. Not to mention we are a glamorous place to visit. These are all real attractions to overseas suppliers. We should sell these benefits to reluctant world-class vendors and at least secure greater supply side options for our organisations.
- It’s not all about COST – but benefits realisation
Australia is a smaller economy in global comparison – around 13th in GDP terms. Yet most major suppliers are based in the much bigger top 10 or so countries; not here. Moreover, Australia is a service-based economy with around 70% of GNP generated by services (and only around 9% from manufacturing and just 6% from resources).
This means we mostly buy indirect goods and services, in relatively low volume, to support our organisations’ operations. Applying strategic procurement to non-strategic spend has limits. Savings tend to zero over time. So, in a small market like ours, competitive sourcing strategies (like tendering) ultimately offer limited impact. How much will you save going to market for your stationery supplies for the 17th time?
Too often in Australia, and perhaps elsewhere, successful procurement is measured in terms of naked cost savings or cost avoidance. The bigger the savings, the more successful the project for procurement. Too often we register the win and celebrate early – before the work has truly started and the reality of delivery has traction. Instead, we need to be looking more at cost savings together with benefits realisation when measuring success and holding ourselves accountable. Our challenge is to bring to reality all the benefits envisaged in the business case and negotiated in the conference rooms with hungry vendors.
Every major project has a business case which outlines why a purchase is justified. Often a laundry list of potential benefits outweighs the simple costs of the project at this point in exhaustive cost-benefit analysis and even NPV calculations. But how often do we genuinely realise all these benefits – both hard and soft? How do we measure them? Are they aligned to, and supportive of, our organisation’s goals and strategies? How do we contribute beyond simple cost savings? What opportunity have we captured?
Good contract management, stronger resource support and growing SRM will help deliver a much wider range of benefits for all our stakeholders.
- Low investment in supply side capability – in people, process and technology
Obviously, Australia operates on a much smaller scale than other “western” markets such as the UK and US – even though our standards and desire for quality might be more equal. As a result of size alone, our organisations spend substantially less. Australian procurement teams manage smaller budgets and smaller contracts. And our lower spend profile typically means smaller procurement teams with fewer resources and less investment.
But these smaller teams still have the same job and the same processes to follow as their overseas counterparts – as we face similar risks. Irrespective of the size of the contact, the same compliance standards and due diligence requirements apply, and this leaves many procurement teams under resourced and under qualified in proportion to the work they must undertake and responsibilities they must bear.
Bringing talent into our profession is more important in smaller teams than in much larger ones – to help manage our similar exposure levels with less resources, but also to better capture more limited opportunities. demonstrated in 2010 that in the area of supply side management, investing in talent was twice as rewarding as comparable investments in technology, strategy or process. Smart people figure it out.
Yet the support of leading edge processes and technology can also make a real difference. Increasingly we are automating procurement – especially where oversight concerns have grown and compliance requirements multiplied. This investment improves risk cover, builds compliance, reduces costs and prevents delays. Importantly, it saves real time – time which can be used more profitably by alert buyers strategically targeting supply side risk but also capturing tangible opportunities to realise greater benefits for all of us.
Nowadays the old Aussie adage of “she’ll be right” has become a furphy for large-scale global supply chain management. She won’t be right without proactive investment in people, process and technology and genuine hands-on, end-to-end contract management. Organisations will realise this is becoming an essential investment in order to attain organisational success (certainly as we outsource more). It involves more than just back-office expense minimisation.
Sure, Australia operates in an environment with its own combination of challenges that may be unique, but there are also immense opportunities to lead the rest of the world in procurement and contract management – driven by the need to do so perhaps more than most others. First-world standards with developing world volume and limited resources is initially a big ask, but accepting and embracing our differences, investing wisely and adopting genuine end-to-end contact management offer the keys to greater benefit realisation on the supply side for Australasia.
Jonathan Dutton is the former founding CEO of the Chartered Institute of Procurement and Supply Australasia (CIPSA) and now works as an independent management consultant. Jonathan is currently the Interim Sales & Marketing Director for Open Windows Software; a leading provider of modular procurement and contract management systems in Australia. www.openwindows.com.au