Author: Adam Stennett
You’ve heard of Winnie the Pooh, right?
Whether your first introduction to this delightful (but somewhat ditzy) bear was the classic books by A. A. Milne or the Disney cartoons, you probably remember that Winnie the Pooh loves his honey, or “hunny”.
But why am I going on about Winnie the Pooh?
Well today, I want to explain to you how sometimes, procurement professionals can be a little too much like everyone’s favourite fictional bear…
You’re still here with me?
Then let me explain what I’m talking about with a quick Winnie the Pooh story.
Procurement story time
In Pooh’s home in the Hundred Acre Woods, everyone is scared of Heffalumps and Woozles. These mysterious, unseen and allegedly malevolent creatures are said to be sly, quick, slick and insincere, and to have a knack for stealing the things you prize most. Things like “hunny”.
Pooh, Eeyore, Rabbit and their other Hundred Acre Woods friends spend a lot of time worrying about these Heffalumps and Woozles, and taking measures to protect their prized possessions – including “hunny”.
But the thing is, Heffalumps and Woozles don’t exist.
These imaginary demons who steal “hunny” are just that: imaginary.
And that means all of Pooh’s “hunny” protection measures are a waste of time.
Which leads me to a big procurement secret…
Too many procurement people out there are irrationally scared of Heffalumps and Woozles (suppliers) taking their “hunny” (money).
(That’s right – this hunny-money analogy even rhymes.)
I see this all the time in the companies I work with. Misaligned attitudes to risk that result in heavy risk mitigation and scoping processes.
I often watch lawyers throw their hat in the ring, pointing at every proverbial Heffalump or Woozle that’s been seen in the past fifty years, and then trying to mitigate the risks associated with them. Sometimes, they even seek to “transfer” risk, identifying everything that could possibly go wrong, then stipulating in the contract that all these risks are the supplier’s problem.
The result: hundreds of pages of boilerplate legal content documents neither the tenderers nor the companies that write them actually read. Or understand.
If you’ve ever had to negotiate the finer points of a ridiculous IP clause for the purchase of a few thousand off-the-shelf bolts, you know what I’m talking about. Perhaps it was even your idea to take this approach in the first place?
Why are we worried about Heffalumps?
The idea behind what I call the “Winnie the Pooh approach” to procurement is simple: if it’s in the contract, your risk is totally mitigated.
But this approach is problematic for two reasons. First, it’s wrong (more about that later). And second, it hurts and hinders more than it helps (more about that later too).
Now I’m not getting all high and mighty here.
I get it.
You’re not a scaredy cat if you’re worried about risk in your procurement process. There’s a hulluva lotta risk out there, and I should know. I’ve been working as a procurement consultant for longer than I always want to admit.
So when I share my solution with you, I want to be clear that I’m not asking you to stick your neck out (or your company’s neck out) and take unnecessary risk.
But what I am asking is that you hear me out while I explain what you should do instead – and why.
Let’s be real
Every risk mitigation strategy costs money. I’ve certainly never heard of any free insurance policies – have you?
(If you have, lemme know.)
Some of these strategies are a wise investment.
But many strategies are so overly risk averse and concerned with such unlikely risks (the Heffalumps again), that they’re borderline uncommercial – or just completely and utterly uncommercial.
The point is, when it comes to procurement, you need to tread the balance of differentiating realistic risk, and Heffalump-style risk that’s utterly unlikely to cause problems.
It’s about discerning what’s commercial, and what’s ridiculous. Understanding what you’re happy to self-insure against. And perhaps being a little braver about what that is.
To explain how this approach works and why you should take it, I’ve outlined 3 home truths about risk management in a procurement context that you can apply to your procurement processes.
You’ll never think of all the risks
No matter how much training or experience you have, you can’t anticipate every risk you’re going to face in procurement. In fact, you can probably guarantee that your biggest risks are the things you won’t and can’t think of or anticipate, such as things that have never happened before.
If this is the case, then it seems clear that the most sensible approach to take is to mitigate against your main risks.
These are the risks which history teaches us are common. The risks that, from experience or the law of averages, seem likely. The realistic risks that any sensible insurance policy would cover.
Taking a realistic risk mitigation approach like this is faster because you won’t waste hours upon hours hypothesising about unlikely risk scenarios.
It’s also clearer for everyone involved, because rather than a behemoth contract that covers every tiny risk you’ve thought of (but not the risks you haven’t thought of), you’ll have a three-page contract you, your lawyers, your suppliers and their lawyers can actually understand.
And you can still be comfortable that your risk mitigation is appropriate, because you’ve covered all the things that are actually likely to go wrong.
Lawyers help, but they also hinder if you’re not careful
Anytime you get a lawyer’s advice, remember that they’ve spent years studying ever major collapse or issue that’s affected companies for the past century.
Unsurprisingly, this tends to make them some of the most conservative people on the planet when it comes to risk management. Their entire job is risk mitigation, and they’re trained to spot risks that are almost (or actually) non-existent.
There’s plenty of value in this service for your procurement process. But only to an extent. Because what your lawyers haven’t studied is examples of the businesses that succeeded.
While your lawyers have been busy studying everything that could go horribly wrong, successful business people are focused on studying how to get things right in the first place, and devising innovative ways to get them more right or more consistently right.
So when you get your lawyers involved, make sure you use them to help your process but not hinder it.
Lawyers are great at identifying an exhaustive list of things that can go wrong.
It’s up to you to listen to what they’re saying, then take the commercial view and standpoint on whether the risks they’ve identified are probable, or whether they’re something you’re willing to self-insure against.
Apply some common sense.
Like before, the probable risks should go into your procurement contracts. The improbable ones should be left out.
Once again, the end goal should be a straightforward contract that mitigates likely risks and which everyone involved can actually understand.
Remember the 3 “R”s – relationship, relationship and ranch dressing
Ok so yes, I’m kidding. The last “R” isn’t “ranch dressing” – it’s “relationship”, too.
The greatest value you’ll ever find in your procurement processes is in your relationships with your suppliers. And these relationships can end up being more effective at risk mitigation than an 80 page contract.
I believe that the best risk mitigation tool is the words you don’t have to write on the page.
Deep relationships with good suppliers are better than contracts, better than lawyers and even better than Darren up in risk management (no offence to Darren).
A supplier relationship is like any other relationship. The superficial relationships will probably work for a little while, but eventually they’ll break down, big contracts or no. In contrast, the four or five or ten (or however many) deep relationships you build will endure through the little bumps in the road. They’ll work through the rough patches with you. And they’ll have your back just like you have theirs.
If you really want to practice true risk management in your procurement processes, if you want to leave the blame shifting and the “write and pray” contract provisions in the past, then your job is to build solid relationships with your suppliers. Relationships that can survive the ups and downs of life. That won’t come crashing down when your usually meticulous supplier misreads a requirement. That won’t flatline when your organisation asks for a fixed price quote for December, then moves the project to June.
When you build these kinds of relationships with your suppliers, scoping documents can be lighter, legal contracts can be simpler, and your suppliers are more likely to work with you to resolve any unmitigated risk that actually eventuates, rather than join you in a blame-shifting bonanza.
The real secret
I’ve told you already that you’ll never think of all the risks, and I stand by that.
I also said you couldn’t mitigate against them all.
Now that’s true from a certain point of view – the point of view that sees risk mitigation as an entirely contractual affair.
But if you’ve followed my steps above, especially when it comes to building quality relationships with your suppliers, you actually can mitigate against your unseen risks.
Because that’s what good relationships do.
Good relationships can mitigate all the risks because when you have a quality relationship, you’re committed to dealing with problems together.
Now you know the real secret of procurement and risk mitigation.
And I want to hear what you think about it. Whether you love what you’ve read or hate it, please drop me a line.
Like what you’ve read?
This is an excerpt from my new e-book, Beyond category management – new thinking in procurement teams, which is available here.
Like I said at the beginning, whether you love what you’ve read or hate it, please drop me a line here (firstname.lastname@example.org)
Have you heard about PASA CPO Summit in March? ‘Future Proofing You’ will be held on 13 & 14th March 2018 in Sydney.