Before procuring, ask - do we really need it?

 

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At some point in personal or professional life most of us have come across instances of procuring things only to realise later that they are really not needed or they do not improve the current situation in any significant way. It’s a clear case of a bad procurement decision, not the procurement process. In personal life, this may be the result of impulsive or compulsive buying disorder. At times, rational procurement can become a myth in some of the organisations too, especially where there are inadequate financial and administrative controls on capital procurement and procurement of non-standard materials and services. 

According to a 2022 article on the World Bank blogs site, “Governments today spend an estimated $13 trillion each year on public contracts for goods, services and public works. As much as a quarter of that is wasted in inefficient or shortsighted procurement practices. Halting the waste could free up at least $1 trillion a year”. This is true also for the private sector, though to a lesser extent because in the private sector a more rigorous due diligence is a norm. 

Take another report by Oomnitza in which, according to ‘The 2023 Snapshot Survey: SaaS and Cloud Spend Optimization and Automation’ conducted by YouGov, “50% of enterprises waste at least 10% of their annual expenditures on software and SaaS applications”. The focus of the survey is just a small aspect of the business spending i.e. SaaS and Cloud, where in a typical medium or large organisation, the spend on IT is less than 10% of the total procurement budget. This puts  in perspective the enormity of the problem when other spend is taken into consideration. 

Unwanted procurements take place in all organisations - public or private sector, large and small. The reasons can include lack of knowledge, lack of professionalism or outright corruption. The reality is that the people involved in the decision would not like to state publicly that they have made a wrong decision and such procurement failures often go unreported. One of the key risks in procurement is ending up procuring what you don’t need or what you can’t use.

Procurement is an action to address a business need for continuation or changes in the organisation’s goals, which need additional capabilities, infrastructure, knowledge or other resources. Just like in our personal life, in organisations too, when it comes to procurement, there are needs and there are wants. It is important to make a clear distinction between them. In a manufacturing scenario where a bill of material and its relation with a final product is well defined, it is easy to distinguish between a need and a want and invariably the need for procurement is driven by the sales plans and forecasts. Even in such a well defined scenario, it is not uncommon for  organisations to end up with excess and non-moving inventory.  But in other cases of procurement of non-standard items, especially where a capital goods or a service procurement is involved, in the absence of a rigorous validation process, the line between the need and the want can be blurred. Our discussion now is intended to address this type of procurement.

One of the primary responsibilities of the Procurement function is cost reduction. Procurement function puts in a lot of effort in saving cost by various means such as strategic vendor development, negotiation, value engineering, material substitution to name a few. The ERP and other tools help in streamlining the procurement process and eliminating the process wastages. Well developed, documented, and effectively implemented policy and procedure ensure compliance with the competitive bidding process and thereby the lowest life cycle cost. All these actions result in some savings which is merely a small percentage of the total purchase cost. What if the cost reduction is 100%? It may look like something impossible, but think again. What if the procurement itself can be eliminated? Yes, it is possible in at least some of the cases,  if you add one additional step in your procurement process i.e. assessing the need for procurement. It means, before initiating the procurement process, asking a simple question - do we really need it? Mere availability of funds and authorisation to procure should not be the criteria to procure. The role and responsibility of the Procurement function should be far beyond this. Due to the way organisations are structured based on functions, it is a general belief that the procurement process starts with receiving an authorised purchase requisition with approved funds. This is a traditional approach. The role of Procurement today is much wider and it starts with supporting the user departments in firming up their requirements by way of RFI or by providing vendor/product or market research information. There is a need for taking this Procurement function’s scope one step further i.e. involvement in the need assessment process. Due to their functional expertise, the identification of need is in the domain of the end users. However, the assessment and validation of the need must be a multi disciplinary action, where along with other functions such as strategic planning, finance, facilities and maintenance etc., Procurement is also a participant and contributor. This multi disciplinary approach can add transparency and objectivity to the need assessment process.

Environmental sustainability is another aspect where the Procurement has a role to play and a social responsibility. Every time an item is procured, there’s an impact on the environment by way of natural resources used to produce it, the energy spent on manufacturing, transporting and preserving it and finally while disposing of it. It’s not just the goods, even service delivery has an impact on the environment. When an unwanted procurement is done, all this adverse impact is without a matching or justifiable benefit to the organisation and the society and Procurement’s responsibility is to identify and avoid such procurement. If you want to contribute to preserving the environment, procure what is really needed, consume what is necessary, and completely eliminate avoidable procurement.

Procurement Planning

Procurement planning can be divided into two phases - pre-budget and post budget or in other words before commitment of funds or after commitment of funds. The first phase deals with the procurement need and the second phase deals with the procurement requirement. It is the funds allocation that transforms a procurement need into a procurement requirement. 

During the initial part of the procurement planning process, a procurement need is identified, validated and translated into an actionable procurement requirement. Once an authorised purchase requisition with approved funds is released, the procurement function takes over the process and the second phase of the procurement planning involving sourcing, procurement strategy, contracting etc. starts until the material/service is received and reaches the requester. 

The procurement need assessment and validation is part of pre-budget procurement planning. The best way to implement this would be to make the procurement need assessment part of the annual planning and budgeting process, where the initiatives for the year ahead can be identified and justifications sought. The information can be gathered using a standardised Statement of Need template, which facilitates structured and objective review. For large procurement needs, the need identification and assessment may take a much longer time and such requirement assessments must be done outside the annual planning and budgeting process.

Statement of Need 

A procurement need is action necessary to fill the gap in the current and target capacity, resource or infrastructure necessary to achieve the organisation’s goals without any adverse impact on the business. The impact can be short term or long term and the impact can be on the market share, customer loyalty, quality and timeliness of product/service delivery etc.

Some of the triggers for the need are:

• Increased demand

• Change in technology

• Changes in operating and business environment

• Changes in quality requirements

• Launching of new product or services

• Assets nearing their end of useful life and thereby need for replacement

The Statement of Need is a high level document that does not go into the details and specifications, but focuses on outcomes and desired results. The requirement at this stage is identification of the resource gap and what is required rather than how it can be provided. For example, insufficient housing units creates a need for additional accommodations for staff, but this in itself does not create a requirement of building new housing units. The requirement to address this need could be lease additional houses, build new houses, change in policy in allocation of houses to staff, change in policy to provide housing allowance rather than provide accommodation etc. Accordingly the fund allocation and the procurement request will change.

It is important to align the identified need with the organisation's long term goals, strategies and objectives. The best entity to identify this need is the process owner department. The identified need must be discussed with key stakeholders and their concurrence obtained before seeking funds allocation and converting it into a procurement requirement. One of the stakeholders is the Procurement function and the other stakeholders could be finance, strategy, marketing, production, planning, quality assurance etc. based on the nature of the organisation and the need identified. The advantage of this early involvement Procurement function is that they know in advance what procurement they have to deal with and can start the process of identifying the sources, conducting market research, looking for options and even carrying out a RFI or RFP thus widening vendor participation and cutting down the overall procurement cycle time after receipt of approved procurement requisition. They can also share their past experience on various other alternatives and solutions and their experience on similar needs of other functions addressed in the past.

The following are some of the things that a Statement of Need must address:

• Identified gap in resources that hinders in achieving the business objectives

• The purpose behind the need

• A timeline for fulfilling the need

• Adverse impact on the business if the need is not actioned

• Key stakeholders and process that are impacted

• High level functional requirement of the need

Assessment and validation of procurement need

All spend on procurement must translate into a specific tangible benefit to the organisation, that is traceable and measurable with clearly defined KPIs. The benefits may be financial or non-financial. The benefits must be real and accrued within a specific time frame. Procurement need analysis is a process of assessing identified needs and validating them by conducting due diligence and deciding to park, reject or endorse them for further action. It is a crucial step, especially in technology procurement where the lifecycle of the procured item is large and investment is also large. Once a decision to procure is made, even if subsequent analysis of the need indicates a wrong decision, the sunk cost fallacy often prevents from stopping the process and the tendency is to continue with the procurement because already considerable time, money and effort has been put into it.

Involvement of all stakeholders including Procurement is important to ensure that the need identified is genuine and integrated with other functions needs. Procurement needs are based on certain assumptions and it is essential to understand and challenge these assumptions and validate them during the need assessment. As every need has a different level of urgency, prioritisation is part of the assessment process.

Some of the questions to be asked and answered at this stage are:

• What necessitates or causes this need?

• Can the causes be addressed in a different way or eliminated?

• What are the strategic objectives of the organisation to which this procurement need is linked?

• What is currently done to achieve the intended function of the need?

• Is this a transient, temporary or long term need?

• What are the risks and consequences of not actioning this procurement need?

• Are there any planned or ongoing projects related to this need that may be impacted or can impact this need?

• Can this need result in other related needs within or outside the requesting function?

When key stakeholders validate a need, it is important to take into account the need as a collective need impacting all of them and considering their current, emerging and future needs as an integrated requirement, rather than looking at it in isolation. This entails taking into consideration the related projects, tasks and activities that are currently in progress or upcoming in the near future.

While assessing the need it is important to take into account not just the current state of the business but also the future, maybe 5 years hence and see whether this requirement will remain, change, cease to exist, or will grow and address it accordingly. A strong belief and bias towards a solution must be resisted at this stage. On technical matters if inhouse expertise is lacking, external resources may be engaged at this stage. 

The assessment should lead to either eliminating the need, scaling up or downsizing the need, or postponing the need, and if appropriate, recommending conversion of the need into a procurement requirement.

Converting a need to a procurement requirement

Once a need is assessed and endorsed by key stakeholders for further action, it becomes a Procurement requirement, that is ready for requesting funds allocation and converting into a procurement request. 

Due diligence prior to procurement can result in substantial savings and prevent wastage of resources. Procurement function can play a crucial role in this process.