Holistic Thinking For Indirect Procurement-Part 3 (final)

 We describe here the service, commercial and governance Model and we conclude by suggesting how managers can coach their buyers using these models.

THE SERVICE MODEL

The service Model is at the crossroad of other models. Considering all the information gathered aims at aligning the business needs and the service delivered by the supplier. On the business needs, there is an obligation to clarify what is the scope of work performed by the supplier, what are the requirements and needs that should be fulfilled and what measure would reflect the value delivered by the supplier.

All this must be consistent and expressed with the simplest terms. Then the service delivery side needs to reflect the scope of work, the business requirements, and the performance measures.

Fig.6 Service model

This includes clarifying the profile of the overall team that delivers the service, the key positions in this team, what are the meaningful measures that can reflect the performance of the people in these positions? Finally, it will be important to ensure that the way this team is managed also aligns with the scope of work and the user’s needs.

Imagine for instance a situation where your company is integrating within its teams and activities some external software developer who is also supported by people located in shared service. In such situations it is essential to ensure that all points described above are aligned and that grey zones are kept to a minimum. It is not about establishing bureaucratic controls; it consists in establishing the minimum viable setup that ensures that what you get is what you expected.

The COMMERCIAL MODEL

A Commercial model is the heart of the contract. It states what you pay for and on what basis the buying company is going to be charged. If you pay for the time and materials needed to deliver a service, you need to define the source of information that will be used to calculate what needs to be paid. If you pay for performance, you need a formula that relates pay and performance, including possible rewards or penalties. If you agree to share risks and revenues, you need a mechanism to produce the right calculations of who gets what share of the revenues. Any commercial models have benefits but also drawbacks. Times and Materials offers no productivity incentives. Performance based are hard to establish without deep knowledge of how the service works. Revenue sharing mechanisms are difficult to establish when high transaction cost exists.

Choosing the right commercial model is key, it should prevent opportunistic behaviours but most importantly, all parties need to see it as fair and reliable. Additionally, when this is defined, the right key performance indicators and other contractual clauses can be developed.

The GOVERNANCE MODEL

The aim of a governance model is to describe how key decisions are taken and who exchanges information with whom on a diversity of topics. The aim is to have a minimal but very effective set of interactions within and across each company.

First it needs to describe what type of information is reported to whom, how it is segmented so it can be used efficiently and at what frequency this reporting needs to take place. Additional satisfaction survey, performance measure or audits also need to be defined so their review and the development of improvement plans can be performed in specific meetings.

The governance model also describes what meetings need to take place; what are their goals and who needs to attend them. This can include Executive meetings, Operational reviews, Business reviews, innovation sessions and other project meetings. It is essential to describe precisely who needs to be consulted and informed before and after such meetings.

 It is important to ensure that the governance of the relationship does not fall into the micromanagement of a multiplicity of issues, but addresses key questions such as: 

-is the performance satisfactory?

-How do we jointly improve?

-What are the opportunities and challenges we can have?

To take effective decisions and reach excellence in implementation, internal alignments across functions and geographies on both sides are important.

USING THE SIX MODELS TO COACH INDIRECT BUYERS TEAM

The Six models can be used in different contexts. One of the most efficient ways to use them is for purchasing managers to coach their team members with the six models as a framework.

At regular intervals of time during a project, the manager can sit down with a buyer or a group of buyers to support mutual learning. Altogether they can discuss progress through the lenses of the six models. A good starting point is to agree on what is known or still unknown across the six models. Fig 3 can be used as a guide to do this critically and creatively.

Fig. 7 using the six models critically and creatively

By doing so the manager asks the right questions at the right time. This helps buyers to make the best use of their time and to focus on what matters most throughout a project. It is also a great opportunity to look for new opportunities, to look beyond the obvious and to think differently about one of the models.

The business model, the commercial model and the cooperation model offer the best opportunities to think differently and to come up with creative ways of fulfilling the needs of the users.

The Operation model, the service model and the governance model offer the best opportunities to ensure that outstanding performance can be derived from the collaboration with the supplier. All of them need to be addressed.

The best and most effective relationships are nourished by enlightened decisions and conscious implementation. The six models offer an opportunity to adopt a holistic approach to indirect procurement. To excel at indirect procurement and deliver value to the business, we need to know the trends in our industry, our markets, our company, our suppliers but also ourselves so we can cultivate a spirit of excellence and help each other.