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The procurement delusion: a frustrated relationship with values-driven HR, masked with a smile?

David Woods , 07 Aug 2012

the procurement delusion

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.

 

4 comments on this article

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Procurement is for commodities

Marc Effron 07 Aug 2012

Having been both a corporate HR leader and an HR consultant, I've had the misfortune of dealing with procurement (purchasing as we call them in the U.S.) from both sides of the table. The challenge is mistakenly treating HR needs in the same way as the commodity needs of other parts of the business. If you need 50 miles of 3 inch PVC pipe, I want procurement driving a hard bargain. If you need an executive coaching company or an audit of talent management services, their value quickly diminishes. While some HR services may be relatively comparable across vendors (say job pricing or benefits admin), even standard processes like an engagement survey may be delivered by different vendors in ways that add or subtract value from the process. Procurement often drives up costs for the organization in this process because their addition to the equation does not increase the result. If I have to spend 4 hours explaining what "good" is procurement so that they can spend 16 hours evaluating good, we're just destroyed 16 hours of value. A better solution -- a budget! Novel, I know. "Here HR - you have $4.5 million to spend this year based on the initiatives you've proposed. If you want to do more, swap out initiatives or drive a harder bargain with your suppliers." In a world where keeping costs low is paramount, a 20% across the board cut in procurement staff feels like a reasonable contribution to the cause . . .

Procurement is a diversity and performance issue

Safia Boot 08 Aug 2012

The lack of proximity to the strategic objective in procurement was evidenced in the case of the sweat shops in Leicester used by branded high street clothing retailers because they were unaware (or ‘wilfully blind’) that their suppliers were using a low waged labour force. In another example an external procurement company was brought in to manage the ‘beauty contest’. In return it set an upper price limit that the client was prepared to pay inclusive of its own 16% commission for its initial and ongoing involvement in processing invoices for the HR services - a high price to pay for an unnecessary bureaucratic/broker function? The importance of making a personal ‘connection’ with the key decision maker (despite the presence of a panel) has been noted. The belief that procurement decisions are ‘designed to to be completely fair and that emotional decisions cannot cloud business plans’ – is fine aspiration but it is not the reality. We buy from people like us – we assess others on the basis of ourselves. Procurement and HR departments are largely homogenous. Hence there is the capacity for ‘unconscious bias’ to creep in unchallenged. For instance, when watching the British TV talent show ‘the X-factor’ fans were reported as up in arms over Judge Cheryl Cole’s decision regarding one of the contestants, Cher Lloyd. Cher Lloyd had demonstrated inconsistent performance but still ended up going through to the live finals. On the other hand, Gamu Nhengu, who performed consistently to an excellent standard was rejected. The ‘similar to me’ effect has been scientifically researched and documented. Cher Lloyd and Cheryl Cole have similar sounding names, physically look and sound similar. The reliance on personal preference seems to be the reality of many business decisions despite ‘the mask of objectivity with a smile’ (and legislation). Whilst, the public sector may endevour to be more transparent in the knowledge that suppliers may be prepared to challenge decisions, the private sector in the experience of many SME’s, especially BME-led SME’s is largely ‘lawless’ and lacking in transparency. It is not suggested that procurement decision makers intentionally set out to choose look-alikes but to believe that decsion making is somehow totally objective is naïve at best and self-delusional at worst. Without an element of self-awareness we risk perpetuating the status quo. Procurement is both a performance and diversity issue. Suppliers are also potential customers, with a wide network of contacts who also are both customers and employees – we are all inter-connected. Negative supplier experience can have a damanaging effect on the corporate brand. Often suppliers have to (rightly) jump several hoops to demonstrate quality assurance (it’s an expensive business hence prohibitive for many SME’s). In the end a supplier can find a client will not bother to tell them the outcome (just as many job applicants are expected to assume these days) that ‘no news’ means you were unsuccessful. What such poor practices by buyers (and employers) demonstrates is a lack of commitment to building genuine partnerships based on a power imbalance - ‘a buyer’s market’. It is a poor foundation to build trust hence too often suppliers, clients and employees end up in conflict when perceived expectations are not met. This largely leads to resolution via costly litigation (rather than mediation) further driving the the win-lose rather than win-win mentality. The supply chain is after all a key part of performance delivery for the organisation to achieve its goals. It is also a missed strategic opportunity for HR and procurement departments for ensuring wider community inclusion and cohesion. We need to identify measurable outcomes to achieve real employee/supplier inclusion and diversity.

Conversations do not have to focus solely on price

David Pearson, Director of Protravel 09 Aug 2012

We have certainly found that procurement has a growing role in the purchase of travel rewards and incentives and agree with Philip Wood that “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.” Our experience has shown that many procurement professionals understand that everything does not come down to cost. If suppliers are able to demonstrate what they can deliver in key areas such as expertise, quality, service levels and customer service standards, then it is possible to have a conversation that is not focused solely on price. When dealing with the purchase of travel, for example, this is particularly crucial as there are so many elements to consider in order for the incentive or reward to be appropriate for the target audience and for it to be executed flawlessly. Clarity is paramount, as is an open book policy to clearly show where the costs are, and where the profit is going to be made. Although not necessarily specialist in the industry, simple explanations and presentation allow the procurement person to feel at ease with what is being presented instead of being ‘baffled with jargon’ and put on the defensive. In particular, case studies and examples of previous projects allow the procurement professional to put into perspective how a particular scenario could work in their business, which gives a level of comfort David Pearson Director Protravel

Might we all work together a little more effectively?

Peter Collis 13 Aug 2012

I will start by declaring my hand. In around 20 years in business I have spent around 10 years in procurement (both direct and indirect expenditure and both private and public sector) and 10 years in recruitment (predominantly major accounts, managed services and RPO). I therefore like to think I can sympathise with both the HR professionals and their procurement colleagues. What strikes me about the article and the previous comments is the lack of acknowledgement that the HR community and the procurement function are on the same team with the same objective; securing 'best value' for their business. 'Best value' can encompass a lower price and/or a better service and/or improved adherence with supplier diversity objectives and/or improved access to key skills and/or a range of other benefits. Any company that is running a procurement process that looks anything like a half decent strategic sourcing process will pull together a team with the appropriate skills and interests - HR, procurement, other stakeholders - to ensure that the objectives of the process are agreed by all at the outset and the means by which these objectives will be met is bought into by everyone. To say procurement "procurement is for commodities" is nonsense. I tend to draw a distinction between 'purchasing' - a transactional role - and 'procurement' - a more strategic role charged with successfully facilitating the process described above. To say "to believe decision making is objective is naive and self-delusional" is somewhat admitting defeat. Why can't an appropriate team of professional with a common goal be objective in their decision-making. There does seem to a habit of those involved thinking "my requirement is special and difficult to define". Having been involved in the procurement of goods and services from rocket parts to rock salt and from outsourced IT to social services support, I now believe -perhaps in a deluded or naive way - that anything can be appropriately defined to enable a successful procurement. Similarly a relationship with chosen service provider can be structured to enable all key stakeholders to have appropriate access to the supplier to build the necessary relationships to support successful service provision, continuous improvement and the development of a long-term partnered relationship. It only needs HR and procurement to try hard at working together a little more effectively. Peter Collis Managing Director, elemense

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