INTERVIEW / INNOVATION Q&A
INTERVIEW
somewhere to share it. And every idea in the pipeline gets vetted, reviewed and revised. It could be that 99% are rejected, but the 1% that hits could change the face of your relationship with your supplier. Q. Why aren’t more organisations acting on innovation from suppliers? The problem is very few organisations have any kind of structured approach to generating, reviewing and actioning innovation from suppliers. Many organisations are yet to even focus on supplier relationship management activities. Of those that do have supplier management in place, only a fraction have any means of collecting ideas with a majority of them still lacking a formal framework for innovation. The number of businesses capitalising on this opportunity is limited which only makes the potential all the more substantial.
Q. How do you decide which suppliers to work with?
For instance, the business asks for 100 more resources (people) to work on a project. If the innovation framework is up and running the business and the supplier have a means to suggest an idea – such as, can it be automated instead? If you have a relationship with that supplier you can have that conversation. If they have a solution you can use, that’s a cost saving that resulted from an idea and structured process of discussing it. The second is value beyond cost – this can cover any number of areas, such as efficiency, risk, product development, joint go-to-market activities and so on. It’s not based on the 5-8% that affects the bottomline, but could impact revenue. The very nature of having a pipeline of ideas creates a juggernaut that can be very impactful to your business. Q. How do you use this to build on the business case for investment into SRM and innovation? Let's apply what we have learned here to three different possible outcomes. Scenario 1: In this scenario there is no SRM organisation. Typically the business loses the 5-8% savings it thought it had gained through the strategic sourcing process because there was no management of the supplier during the life of the contract. Scenario 2: The customer has an SRM organisation but they do not have an innovation framework. In this case, the business may manage to keep the 5-8%, but then at the end of the contract term the procurement department may ask if they can achieve a further 5-8% saving by taking the business scope back to the market. Scenario 3: In this instance, the customer has an internal SRM organisation and applies the innovation framework. This produces the best case scenario. Now they are generating an average 2% of hard financial value above contractual obligations. Applied and compounded across the full duration of say a $10 million-a-year contract, the business can achieve far greater value.
Not every relationship is suitable to apply this method and even those that are – the most strategic partnerships – could still take some time to prepare. Over a substantial five-year deal with a new supplier, you may spend the first two to three years stabilising the contractual relationship. You have to wait until that relationship is steady to apply the framework. By stabilised I mean you are achieving the minimum and expected levels across your service level agreements (SLAs). It is because it can take time to reach this point that I suggest strategic partnerships are set up for closer to five years. This makes years four and five your ‘golden years’ in which you can generate that additional value. If the relationship is mature, it can lead to an average of 2% more value for your business. And if you renegotiate and then renew with that supplier, the compounding starts from year one, not year three as it typically does for an engagement with a new supplier. It’s a very powerful concept that can drive substantial return in value for organisations.
INNOVATION AND IDEATION: HOW STATE OF FLUX CAN HELP
For many organisations, supplier-enabled innovation remains a prized yet elusive goal. The commercial rewards are clear: research shows that firms who collaborate systematically with suppliers record an EBIT (earnings before interest and taxes) growth rate that is double that of their peers. In 2018, for the first time in a decade, innovation was cited in our report as one of the top three drivers for more strategic and collaborative supplier management. So an increasing number of businesses recognise its value. Acting on this is the next step. There are various approaches companies can take to generating ideas from in-house to open innovation. State of Flux has a diagnostic tool, inside its Innovation Engine, that can help you to determine the approach best suited to your organisation’s goals. It does this by assessing eight key dimensions including the leadership and management your business has, its partners, the availability of data, how results are tracked and what support and incentives there are. Once this is done, State of Flux can help your business establish a process for generating and capturing innovation that overcomes common challenges. This process helps you to segment ideas as they come in to evaluate which are ‘breakthrough’ or ‘radical’ and which can make ‘incremental’ changes. We can also provide the technology, training and a systematic method you need to help funnel ideas through a pipeline. This helps you collect, assess and then act on the best of the ideas put forward. It provides a structured and transparent process, has key decision points to control the time, effort and investment allocated to ideas, and enables ideas to be easily tracked and reported on with metrics that show capture rate and conversion. To find out more about how State of Flux can help your organisation generate, capture and act on great ideas, email enquiries@stateofflux.co.uk
Q. If the advantages are clear, why are too few organisations doing this?
One issue is the difficulty many have in making a powerful business case for SRM. It has to be explained in business terms and most focus on the 5-8% they plan to protect. Often these percentages are not strong enough to convince the business that you need a whole organisation set up to do the work. But the opportunity is far greater than that, which is what needs to be conveyed. If procurement could instead make the case that their SRM department will focus on being net generators of value, instead of protectors of it, and concentrate on the value they can achieve beyond cost, they may have a much more convincing case.
Q. What’s in it for suppliers?
At the end of a contract the business has three choices – the 3Rs. It can renew without even having a conversation; it can renegotiate with the supplier but change some of the scope, financials or legal requirements; or it could do an RFx (such as a request for information, quote or proposal) and go back to the market. The likelihood that it would jump to renew or renegotiate will depend upon how much value the business has generated from the relationship over the past few years. If the supplier has delivered compounding value over and above its contractual obligations, it has a good story to tell. It becomes easier for them to prove they've benefitted the organisation and it is a clear win-win for both sides.
Q. What else is holding people back?
Another mistake many make is thinking the SRM department has to own all the relationships with suppliers. They don’t. That can make their department too big and costly, which diminishes the value they achieve. Supplier relationships have to be owned by the business, supported by a centre-enabled model where the SRM experts provide the framework and tools. They influence, they have access to the technology, they can oversee conversations and activity and they step in as and when they are required. They have to release the control when it’s working and get more involved when it’s not. At the point that it is working like a well-oiled machine, SRM professionals can focus on the outcome, outputs and deliverables. They can show the additional value the process has achieved and go on to find yet more of it.
Q. Where do the savings come from?
They can be achieved in any or all three areas of people, process or technology. The sky's the limit. Some savings, for instance, could come from driving efficiency in operations or within the contract itself by increasing automation. Or they could even come from joint go-to-market activities. Everyone should have access to the idea pipeline – where if they see something, they say something. Whether you’re the supplier, SRM professional, procurement professional or internal customer, if you get up in the morning and have an idea, you have
IN FORTUNE 100 COMPANIES, INDIRECT SPEND RUNS INTO BILLIONS OF DOLLARS, SO THE VALUE AT STAKE IS SIGNIFICANT.
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2021 GLOBAL SRM RESEARCH REPORT
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