On average, two thirds of any business’ activities today are performed outside of their organization by third party suppliers (see this research for more detail). And it’s a growing trend.
These suppliers support both core areas of the business (such as Apple using Chinese suppliers to manufacture its products) and non-core areas (in which every large business has thousands of suppliers providing everything from legal advice, to marketing services, to facilities management).
Your business will be no different. Just how much is performed by suppliers (as opposed to in-house) will depend on your industry, your business objectives and what stage you are at in the externalization journey. This is the way of modern business.
You use suppliers because they have become really, really good at developing and delivering what you need: goods, services, expertise, IP, new innovations and so on. They do it better than you can achieve in-house – as well as being faster, cheaper, more reliable, lower risk, more efficient, and more effective.
Great… so what’s the catch?
In core areas of spend – there is no catch. Businesses see the value in investing heavily in improving their supply chains. It’s well managed, and gets the attention and focus it deserves.
But in non-core areas? It’s a very different story. There are a number of catches. Let’s explore two of them:
First, suppliers employ a small army of sales resource to take their offering to market. We’ve seen instances where a single supplier has a larger account team selling one contract than the entire procurement function it’s selling to. This is just an example of one supplier, selling one contract. You use thousands of suppliers.
Suppliers’ sales people are expert at using smoke and mirrors to try to highlight their sales messages, drown out the competition, maximise their margin, get through your procurement processes and procedures, maximise their ‘share of your wallet’, and so on. And after the sale, they do everything they can to claw back any sales revenue lost during the negotiation process – through cunning change management programmes and extensive re-configuration programmes.
And secondly, and more importantly, this trend of ‘externalization’ (moving work from internal resources to external providers) has created a big shift in where control now lies. Your business no longer has it. Your suppliers do!
But who runs the risk of something going wrong in your supplier base, like the wrong professional advice, deliveries arriving late, illegal workers, ‘horsemeat’ or negligence? You do. Who suffers if governance fails? You do. Who suffers if your suppliers perform poorly? You again.
And who makes large investments in innovation, R&D and market intelligence? Your suppliers. Who can bring knowledge, insight and continuous improvement initiatives gathered from multiple industries and regions? Your suppliers. Who has the greatest potential to provide the support that has a genuine impact on your corporate objectives? Your suppliers.
The response to bridging this enormous gap between your business needs and your suppliers, is called procurement. So how’s it doing?
Well, as this video explains, conventional procurement is failing in non-core areas.