Michael Schrage
Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, is the author of Serious Play and the forthcoming Getting Beyond Ideas.
Procurement's Best-Priced Deal May Stifle Innovation
Every single innovation conversation I've had recently with business unit leaders, product managers and/or marketing executives invariably focuses on the importance of partnership and collaboration with their best suppliers and vendors. If anything, they wish their suppliers came forward with even more actionable and innovative ideas. Conversely, I have not had one conversation with a procurement executive or officer for whom an innovation partnership with vendors was mentioned as a corporate priority. What a disconnect.
When I politely point out procurement's role in selecting, shaping and paying for partnerships, the answer I get astonishes: We can reimburse our suppliers and partners out of another budget. In other words, innovation occurs when we bypass or disintermediate procurement. How healthy is that? What kind of cultural — and financial — signal does that send both to the firm and its vendors alike?
This dichotomy — schizophrenia is actually a better word — is a surefire invitation to conflict and dysfunction. Vendor/partners — who are compensated by procurement — end up having to explain away or conceal the bootleg or graymarket innovation projects they're billing for. Even worse, when suppliers seized by a great idea toil overnight and weekends to present it, procurement argues that this wasn't part of the budget and behaves (quite reasonably) as if it is going the extra mile to compensate the supplier.
This dynamic is unsustainable. Either procurement has to become a genuine facilitator, enabler and champion of the innovation ecosystem or companies have to downgrade and deemphasize the procurement process in order to make innovation a known corporate priority. Defining business processes and structures that inherently devalue and make difficult innovation opportunities is, quite literally, counter-productive.
Can strong procurement departments and strong innovation cultures co-exist? Yes, but only if the organization is honest about whether it creates more value by successful procurement or successful innovation.
The challenge is making procurement as explicitly accountable for enabling innovation as it is for controlling costs. Asymmetry is the enemy. Procurement's people have to enjoy comparable recognition and rewards for making a new product or service profitable as for, say, successfully consolidating a supplier segment or driving cost out of an outsourcing deal. Most organizations are excruciatingly aware when people get celebrated more for reducing spend rather than for procuring growth.
If this means that procurement has to be a better real-time partner to, say, manufacturing or marketing to make sure the money's there to pilot a reprogrammed machine tool or a Cloud-enabled social media promotion, then good. I have never come across a procurement department with a post-procurement "innovation budget" to fund emergent ideas or supplier-driven proposals. Procurement couldn't help but manage its selection criteria differently if it operationally lived with the knowledge that getting the best-priced deal was no longer good enough.
Similarly, other parts of the enterprise have to go beyond giving their requirements for procurement to turn into RFPs and engage in more productive collaboration. "Gaming" procurement to guarantee that a desired vendor becomes the "supplier of choice" is just as destructively manipulative as making "price" the centerpiece of a complex acquisition or marketing partnership. Successful partnerships mean that selection is the beginning, rather than the effective end, of how procurement's effectiveness is evaluated. In the same way that acquisitive organizations have become more savvy about TCO — Total Cost of Ownership — they should rethink TCP: the Total Cost of Procurement. If the monies saved on a contract significantly restrict or inhibit innovation-driven growth opportunities, then just how constructive was procurement's role?
The real-world drawback with this declaration of innovation interdependence is neither cultural nor operational. It's leadership. When procurement and marketing or procurement and operations disagree about what innovation opportunities truly offer value for money, the C-suite will frequently have to intervene. Realigning expectations around the most effective relationships between innovation and price is something top management must choose to do. This may seem counterintuitive in a time when executives are encouraged to delegate and empower. But, alas, the innovation disintermediation and disempowerment provoked by procurers with their eyes a little too focused on the bottom line have demanded this fundamental shift. If the C-suite isn't having candid conversations on precisely this issue, then the operational reality is that procurement is running innovation.
Michael Schrage Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, is the author of Serious Play and the forthcoming Getting Beyond Ideas.
Access Source And Its Great Content: http://blogs.hbr.org/schrage/2011/12/killing-innovation-in-the-proc.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date
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