"Price is what you pay. Value is what you get." - Warren Buffett So you think you've seen it all in sourcing and procurement? Have you tried to weed out real value beyond cost savings? Just because you are saving money doesn't mean you've driven value for your organization. It might seem to be amorphous and unaccountable, but the "value" of a deal or contract is definable by the stakeholders in your organization. Find out what they want, and you find what drives "value" in your company. When you know what someone wants, you can negotiate based on that. Maybe "value" is measured in time. Maybe it's measured in contract commitments. Maybe your supplier needs goods or services you have, that can be applied in barter or through profit sharing. Procurement has matured into more than just negotiating the best contract for the best price. The creativity and innovation that can spur both value and savings comes from doing deals that exceed the simple exchange of dollars for services. Here are a few things to consider when putting together a deal: Deal summary – create an overview of the deal:
- Where did it start, how did it evolve?
- Who is the customer (if there even is one)?
- What is the desired outcome?
Intangibles to consider:
- What is the end game of the particular contract?
- Who does it affect?
- Are you building a bridge or floating a boat...and why?
Forget the monetary reward: Forget a win/lose situation. What counts is how to measure a contract based on the business metrics. Use the main metric to set the bar for the deal– and then figure out how to work together with the customer to meet or exceed the goal. Some industries, such as power and gas, manufacturing, etc., are by nature, high risk, and their priorities may be safety or reliability first. In a contract summary, make sure you list the core company values by priority. But consider how the supplier will deal with the various priorities and where the cost priority falls on the list. Is it last? For a utility company, "soft" priorities like safety and reliability are a higher priority than cost because there's no business without reliability and safety. Metrics that impact the business may drive value in a deal. In addition to measuring cost reduction, calculating the biggest risks or impacts on the business can help identify value vs. cost/savings. Identifying metrics, parameters and feedback on what the business demands are can also drive the deal's definition of value. Is it a factor of time? Is it productivity? Is it ease of delivery? Does it support the main business priorities? And lastly, does it save money? Asking suppliers to partner in problem solving for longer-term goals can drive innovation and raise the bar for the entire industry, not just your company. This drives corporate value, public relations and leadership standing industry-wide. This article was based on a presentation at the SIG Global Summit in Nashville in April, "Delivering Value Beyond Cost Savings." Panelists for this highly-attended session included: Brad Peterson, Partner, Mayer Brown; Kate Vitasek, Faculty, University of Tennessee, and Rohan Ranadive, Senior Vice President, BB&T. For more on this topic, join our buy-side Town Hall Teleconference this Wednesday, June 11, 2014.