The procurement delusion: a frustrated relationship with values-driven HR, masked with a smile?
David Woods, August 07, 2012
Another day, another taxi, another HR exhibition – and all the paraphernalia that goes with it. As an HR professional, it wouldn’t be unheard of to make a career out of attending exhibitions, meeting suppliers and taking away their pens, mouse mats, key rings and the all-important business cards. All part of the procurement process, no?
Footfall at these numerous events is paramount, with vendors moving to secure as many leads as possible from HR pros keen to invest in the latest products, services and consultancy.
Chris Litherland, senior director, HR EMEA and India, at automated information and data capture firm Intermec, explains: "Most organisations will be keen to qualify potential suppliers for standards of business and that puts HR front and centre stage on ethical standards, corrupt practices, a trained and competent workforce, as well as employee engagement.
"As an HR director, you want a supplier to uphold the standards you have taken years to establish. You need to ensure they will be able to deliver the quality of product or services you have contracted them for and be a reliable connection in your service value chain."
Networking, in the 21st century world of HR service sales, is king, with providers ever willing to meet the right contact and secure the holy grail that is a business lead. Equally, HR directors, rightly viewing HR as a people-centric function of the business, prefer personal relationships with suppliers - and face-to-face meetings and cultural alignment are vital in achieving this.
Or are they?
On the flip side of the coin, Philip Wood, executive director of sales at insurer, Health Shield, tells HR magazine as much of 85% of his business comes, not directly through meeting client's HR directors or managers, but through their procurement departments.
Toeing the political line of a supplier commenting in a magazine targeted at his clients and prospects, he adds: "The procurement process is always useful, as it enables us to understand the relative size, budget and decision-making timescales of an organisation. Confidentiality agreements and requests for information are serious buying signals, which indicate an intent on the part of the organisation to implement a product, as part of its healthcare and employee benefits strategies."
But he does admit: "Procurement recommends the final product. A price- and budget-driven procurement department may help to negotiate and drive down costs, but it should also ensure the product is in line with HR needs. If this is not done, then the role of the HR director will certainly be weakened."
From an employer perspective, Andy Brown, head of HR at estate agency Hamptons International, says: "In terms of working with procurement specialists, we don't have a specialist function for procurement in Hamptons. But, in a previous organisation I worked in, HR worked closely with procurement for all purchases.
"It felt like a frustrated relationship masked with a smile, in that I think HR felt shackled by having to involve another department rather than go solo and was not completely trusting of the suppliers, as HR didn't have the relationship with them. It felt inefficient to have a middle man."
In short, too much involvement from a procurement department, not aligned with an HR strategy, could spell disaster by purchasing the wrong HR products.
This idea is of concern to Peter Reilly, director of HR research and consultancy at the Institute of Employment Studies (IES). "Procurement is driven not by business strategy," he asserts. "It is driven by value for money. HR is focused on the delivery, but procurement will be focused on the cost of buying something - and unfortunately not the cost of getting it wrong."
David Vayro, a partner at law firm, Gately, takes the view further: "The HR department might end up working with a supplier it doesn't like. Procurement can make an HR team feel like its authority and control is being eroded by a straitjacket of procurement compliance," he says. But he adds: "It seems crazy - but it is driven by legislation."
Legislation around procurement is complicated, especially in the public sector (see box, EU procurement directives), but in essence, it is designed to make sure that when suppliers are procured, the process is completely fair and that emotional decisions cannot cloud business plans.
"This has to be a rigid 'tick box' approach, especially in the public sector, where there is more strict reinforcement, because there is ample scope for non-compliance and unsuccessful bidders are more prepared to challenge. At any stage, an unsuccessful bidder can take the procuring organisation to court," says Vayro.
"This leads to a tricky interface between procurement and HR, because the HR team may have a clear view about a preferred supplier - perhaps because it is local or has a good ethos - but an organisation can't choose a supplier because it is nearby or because they like it."
Vayro continues: "Public sector HR directors might want to use procurement as a tool for social engineering, bringing SMEs, a particular social group or local businesses in. This is not possible under current legislation [because organisations can't procure based on the locality of bidders]. This means any social engineering would be the result of luck, not judgement."
The Government has placed the hopes of growth on SMEs gaining business and bolstering the private sector, but procurement legislation coming from Europe looks set to choke this (see box).
At the same time, HR directors want to have suppliers promoting HR strategies that are ethical and in line with their own agenda, but cost has the potential to deny this aspiration.
IES's Reilly gives anecdotal example of where a procurement department has put cost before potential success: "I have heard about a reward consultancy that failed on a pitch because it was seen as too expensive by the procurement department and, although it could split its offering into parts, the procurement department saw the elements as inextricably linked, so: one big sum of money," he says.
What is clear is that, in the traditional perception of procurement, there is a serious threat of restrictions on HR in what it can and cannot purchase, even if it has the budget to do so. In controlling the costs - and policing HR spend - procurement departments could be inadvertently damaging HR strategy and, indeed, business strategy.
Is this business red tape gone mad? Perhaps so, but all is not lost - the experts agree the tide is turning. Henley Business School has researched the environmental factors affecting the relationship between procurement and HR (see above) and assessed what better links between HR and procurement could mean for the business (see box, What could better links between HR and procurement mean?).
Nick Kemsley, co-director at the Henley Centre for HR Excellence at Henley Business School and former director of resourcing and development at insurer Prudential, has carried out research into the HR and procurement relationship and believes the two departments are moving together at an increasing pace.
"There is a new quadrant of relationships forming between HR, procurement, finance and risk," he explains. "And it is risk that unites these departments. At a macro-level, HR and procurement are realising they have to work together and strike a balance between themselves and their competing needs.
"Historically," adds Kemsley, "procurement was viewed as the department that said 'here's what you can and cannot do'. Now, with the rise of a more social model of doing business over the past two to three years, along with the move from a central to local style of management - and back again - procurement is not process-rich like it used to be."
Kemsley believes the role of a procurement department in having "global buying power" across organisations has been transformed: the department is the one that now sets a framework and principles across the business, rather than just being a police service to budgets. But, in his opinion, there is more to be done.
"I have heard stories about suppliers that have complained to HR directors because they have had to wait six months to get paid because they don't have a fax machine, which the procurement department wants to send contracts - and then chooses not to work with that business again.
"Different suppliers want to work with clients in different ways, and this is a bizarre situation for procurement.
"HR directors are frustrated at an over-zealous, bureaucratic procurement department, because cost management is not the same as cost-effectiveness and this can damage growth."
Kemsley adds: "HR needs to work with procurement to make sure its contracts are consistent, to mitigate risk and to widen the pool of prospective vendors." Paul Chappel, European procurement director at Xchanging, takes the argument further, from the other side of the HR/procurement divide.
"HR used to close ranks on procurement," he asserts. "But both departments have come a long way, because procurement is high on the business agenda. The focus of procurement is on the core of business and how it can support HR, minimise suppliers and bring in strategic partners to the organisation - in short, keeping close to the HR agenda, while reducing cost, procurement can act as an enabler to HR."
And Chappel believes HR and procurement have more in common than they realise. "I admit they are wary bedfellows," he says. "But HR and procurement were both seen as support functions and now they are strategic. Regulations surrounding procurement go through the roof, but HR can use procurement to tap into areas it struggles to get control of - such as the agency workers regulations. Procurement is not a blocker, but a conduit for supply to HR - so if the two departments work together, they can make sure their suppliers are on the same strategic footing as the business and work in partnership with them."
Gateley's Vayro agrees: "Procurement is misunderstood, because it is not seen as a core function - but it impacts on the core function of business. The HR director might not know exactly what he or she needs.
"When it comes to regulation, the public sector will have been worn down and will regard procurement rules as a necessary but undesirable feature. There is a drive within the public sector to bring the social and economic agenda into procurement."
Jon Milton, business development director at Comensura, a provider of procurement for temporary workers, recruitment and consultants, believes that, with a positive relationship between procurement and HR, positive results will follow.
"The ideal scenario is when HR and procurement work together and each takes account of a project - this allows them to understand profound strategic benefits and a streamlined process.
"If both procurement and HR are engaged, the process becomes more about cost-effectiveness and, after procuring temps, for example, further down the line, the organisation could move to develop re-employment pools, banks of temporary workers or even apprenticeship schemes."
Milton adds: "Procurement accounts for lots of areas and there is a trend towards category management, so one or more people in the procurement department become expert in HR, for example. This would allow them to focus on supporting the SMEs and thinking about bringing HR elements together. Cooperation has got to be the way forward."
Kemsley says procurement can't be an "island of compliance and policy" and he suggests a business model for staff in this department, similar to Ulrich's HR business partner model. Vayro goes so far as to suggest procurement deserves as much of a board-level position as HR does, to ensure an understanding of direction.
But when it comes to the HR/procurement interface, Andrew Powells, director of HR at the Highways Agency, has already put the thinking suggested by the commentators into action in the agency. He explains: "We have a positive relationship with our procurement colleagues, and make sure they're sighted on things that are coming up where we need their help. It is also important we work closely together and understand why certain procurement processes have to be followed - we need to be able to explain this to staff when it impacts upon an HR approach."
Intermec Technologies' Litherland agrees. "Supplier relationship management is not just a purchasing and procurement function responsibility; HR has a role to play in shaping and influencing business continuity in an organisation's supplier network," he says.
"Also, and just as important, HR should be demonstrating the value of its organisation to prospective customers and clients, as well as taking action based on customer feedback."
Brown at Hamptons International adds: "My personal view is that the drivers for decision-making in HR can be quite different to those driving decisions in procurement, so a bumpy road is inevitable. But this only strengthens the need for HR leaders to have a closer relationship with their procurement counterparts, to help smooth this out and ensure the business gets the best of both worlds."
"Procurement must understand HR and be a vital partner," says Martin Rayson, director of HR at the London Boroughs of Barking and Dagenham. He has a nuanced view of the relationship between the two functions (see box above).
The challenge, then, is for HR directors: how can you expect your procurement department to be aligned with your HR strategy and to purchase products and services that support it, if it is not clear what your HR strategy is? Is it time for yet more silos to be broken down in UK organisations?
It certainly seems so.
Environmental factors affecting the relationship between procurement and HR
- Move to more federal operating models - looking for a blend of global and local economies through sourcing relationships, suppliers
- Governance - for example, travel providers global vs local
- Outsourcing/insourcing - employers are looking to deliver bigger, more measurable benefits. Commercial pressures on service level agreements and hybrid sourcing models come into play here
- Flexible supplier relationships - ability to manage loose preferred-supplier lists etc
- Return on investment
- Cost management and efficiency
- Risk management - contract standardisation, common operating terms, business continuity, regulatory and quality compliance, legal complexities etc
- Employer brand - providers now having to be an extension of the corporate brand. This can impact on selection criteria
- CSR/sustainability - needing to validate the credentials of suppliers
- HR costs - need to demonstrate that, as non-revenue-generating, HR is managing its costs and supporting the business in managing costs through people and organisation-related procurement
Source: Henley Business School
What could better links between HR and procurement mean?
- Closer relationship to organisational effectiveness and risk agenda via HR
- More pragmatic solutions that balance global and local needs and opportunities
- Standardisation in some areas, such as contingent contracts and rates etc
- Stronger focus on commercials and scenario planning
- More flexible governance and supplier relationships
- More focus on the tracking of benefits and costs
- Being able to delve deeper into the cultures and values of suppliers
- Stronger focus on supplier induction into 'way of working' of parent company
Source: Henley Business School
Procurement must understand HR - and be a vital partner
Martin Rayson, director of HR at the London Boroughs of Barking and Dagenham and president of the Public Sector People Managers' Association
"The relationship between procurement and HR is an important issue, particularly given the financial situation in the public sector and the need to attain maximum efficiency while cutting costs.
"Commissioning any HR service means working with procurement and, in order for service managers who may be commissioning services to get the best contractual agreement, procurement must understand HR and be a vital partner.
"Colleagues in the procurement departments have to be able to take account of factors rather than price, such as the style and culture of the organisation and the impact purchasing decisions will have on people.
"HR is not alone in having a detached relationship with procurement, so the onus is on both to build a partnership and understand fully what each other does. If procurement is not close to the HR department and sees it as a client, there is the potential for bad practice.
"Service managers sign off on purchasing decisions based on advice from procurement professionals, so I think the procurement department has to assert its influence but recognise procurement is a strategy, driving business forward. And everyone in the business has to work together to play their part in enabling delivery.
"In the same way HR is strategic and 'not just delivering personnel', procurement is 'not just buying products' and needs to cement its position at the heart of business, to meet strategic objectives at lower cost."
EU Procurement Directives
Each year across the EU, the public authorities spend 18% of GDP on goods, services and works. The main objective of the EU Procurement Directives, which come into effect this year, is, according to the European Commission, 'to simplify rules and procedures and make the process more flexible'.
This includes the possibility of:
- increased recourse to negotiation, enabling the contracting authorities to purchase goods and services, which are better tailored to their needs at the best price;
- the extension and, in the medium term, generalisation of electronic communication in public procurement;
- and a cut in the administrative burden.
The EU believes the Procurement Directives will encourage access to public procurement for SMEs: access will be increased and made easier through measures to cut the administrative burden and strong incentives to divide tenders into lots and limit the financial capacity requirements for the submission of a tender.
The reform also includes improvements to the existing guarantees aimed at combating conflicts of interest, favouritism and corruption, in order to better ensure the integrity of procedures, given the financial implications.
The legislation covers organisations and projects that receive public money. Local authorities, NHS trusts, the Ministry of Defence, central government departments and educational establishments are all covered by the legislation.
It states that for public sector tenders over the value of £90,000 (which could include pensions consultancy, healthcare or four-year contracts, for example), employers have to advertise the tender (as much as 52 days in advance of the closing date) in the Official Journal of the European Community.
During the tender process, all dealings with pitching suppliers have to be fair and based on cost - not locality, or any form of personal opinion.
The updates to complex EU procurement rules, which come into effect this year, have consequences for buyers and suppliers in the procurement of public contracts and, by implication, for their advisers too.
But a number of companies have admitted they are still in the dark as to how to prepare for forthcoming changes within the field. A survey of buyers, suppliers and advisers by law firm, Gateley, found while 83% are aware of the timings for the implementation of the Procurement Directives, more than 50% lacked clarity on the breadth and extent of changes to UK procurement law.
Despite 17% of respondents saying they were unaware of the consequences for non-compliance, one in two companies said they had no plans in place for familiarisation with the proposed new directives, in order to implement changes into their procurement procedures.
The research also revealed that 17% of respondents feared the EU directives were likely to have a negative impact on their organisation's practices.