Policies with Teeth

Institute for Supply Chain Management

June 7, 2012

Presenters

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• Daniel Abichandani is a Sourcing and Procurement Specialist in the Toronto consulting practice

• Deep understanding of sourcing and procurement strategy and implementation and has public sector experience with the Ministry of Government Services and Canada Post.

Daniel AbichandaniManager,Deloitte Consulting

• Chris Johnson is a Senior Consultant in Deloitte’s Supply Chain Practice in Toronto

• Experience in cost reduction, planning software, process improvement, and spend analysis for various clients through his role with Deloitte.

Chris JohnsonSenior Consultant,Deloitte Consulting

Agenda

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• Overview of Common Procurement Policies

• Putting Teeth in Procurement Policy

• Keep it Simple

• Timing is Everything

• First Impression

• Case Study – Strengthening the Procurement Function

• Final Thoughts

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Key Policy Elements

Leadership Culture

Escalation / Repercussions

Metrics / Reporting

PolicyFo

unda

tion

Enab

lers

Tact

ical

Exe

cutio

nCommunication

BU/User Friendly

Alignment

Process

Gauging support, resistance and

having a plan to influence

Alignment across people, process and

technology

At all levels of the company

Organization / Decision rights

Technology Incentives / Accountability

Embedded in the technology

Wise reporting relationships and

responsibility areas

Awareness of who is responsible, why and accountability

A means to enforce policy compliance

Embedded in the process Make it easy for

BUs and users to adopt to change

Transparency in reasons for change, requirements and

benefits

Timely and accurate information to gauge policy

compliance and act

Clear, concise and

communicatedProcedure

The road to procurement policy is paved with good intentions

• Organizations have a propensity to develop procurement policies that stem from virtues of compliance, standardization, and control

• However: sourcing and procurement policies frequently fail upon implementation as they lack the substantial bite to gain traction

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Compliance Standardization Control

Procurement Policy

Procurement policy actions speak louder than words

• Procurement policies are intended to initiate and ultimately perpetuate behavioral change

• With the intent of invoking change, there are several simple considerations to put teeth in procurement policies to mitigate the challenges of implementation and adoption:

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Over-complication as a byproduct of

thoroughness is a symptom of ineffective

policies

A challenge is an organization’s inability to

enforce its policies at the time of policy implementation

Supply management should leverage the

policy to leave a lasting positive impression

upon the business units

Keep it Simple Timing is Everything First Impressions

1. Keep it Simple

• Robust procurement policy should take every payment method and requisition into account without crossing the fine line in becoming over-complicated and difficult to manage

• To facilitate end-user adoption, a good approach to procurement policy development is to take the audience into account - every employee of an organization who is empowered to purchase goods or services on behalf of the company and every employee that uses those goods or services is a procurement policy's target audience

Over-complication as a byproduct of thoroughness is a symptom of ineffective policies

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Robust Policy Over-Complicated Policy

• All payment methods and requisition types are addressed

• End audience is taken into account

• Scalable with condensed versions representing regular situations

• Difficult to manage• Target audience does not

include every employee empowered to purchase goods or services

• Not scalable

• Developing easily malleable versions of a full policy document that addresses the question “what’s in it for me?” for each audience group and increases the chances for success.

• With an average 12 minute attention span, the average policy reader would initially prefer a highly condensed and targeted version of a policy over a deep dive into the fine print.

• Policy details cannot be overlooked - Employees should always have access to policy details perchance they require further clarification or face more complex situations

• Condensed versions of policies should merely be a reference guide to the full text - The key is not to over-simplify policy, rather, to have it be inviting and user-friendly.

Modular and scalable policies are highly effective

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Detailed Policy

Condensed Policy

User Friendly Policy

Complex Situations

Normal Situations

2. Timing is Everything

A challenge in procurement policy is an organization’s inability to enforce its policies at the time it plans to release it

• At times, it is important to be comfortable with notion of employees simply knowing the rules first and understanding the operating procedures later.

• The intent of such a policy is quite evident. It allows purchasing organizations to establish spend controls, collect transactional level data/spend visibility against contracts, and meet compliance requirements.

• However, in larger organizations, being able to enforce such a policy efficiently often warrants the support of robust systems to enable the creation, approval and administration of a purchase order.

Take a typical procurement policy that requires a written or electronic purchase order to purchase any of the goods or services designated as requiring one prior to remittance. In the concept of ‘No PO, No Pay’, a properly documented and approved purchase order supported by a corresponding requisition is required to be sent to vendors before a purchase commitment is made. Upon receiving an invoice from the vendor, accounts payable will conduct a three-way match and triangulate the invoice to the corresponding purchase order or no remittance is issued to the vendor. The intent of such a policy is quite evident. It allows purchasing organizations to establish spend controls, collect transactional level data/spend visibility against contracts, and meet compliance requirements. However, in larger organizations, being able to enforce such a policy efficiently often warrants the support of robust systems to enable the creation, approval and administration of a purchase order.

 So it begs the question, if a proper system is not yet in place to support such a policy, would it be premature to ask all of its employees to follow a rule when there is no mechanism to track compliance? The answer is ‘it depends’. There are situations in which the intent for compliance usurps the ability to govern. Many argue that there is no disadvantage to communicating the policy to ensure that the rules are communicated and clear prior to having the ability to track and govern them. On the other hand, if policies are launched without the ability to implement them, organizations run the risk of losing effectiveness. The inability to enforce a policy prior to launching them sometimes perpetuates the notion that policies are nothing more than mere intellectual constructs that an organization is incapable of governing. One of the main risks of prematurely launching procurement policies is that those who deviate from policy could develop a mentality of “No Compliance, No Consequence” which could be far more difficult to reverse.

 

A key to procurement policy development is to properly assess where the limitations of function intersects with the necessity for compliance and visibility. With a careful analysis of the pros and cons of either approach, an organization can better understand the impact of the communications timing in the effectiveness of policy.

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Policy Case Study (No PO, No Pay)

• In the concept of ‘No PO, No Pay’, a properly documented and approved purchase order supported by a corresponding requisition is required to be sent to vendors before a purchase commitment is made

• Upon receiving an invoice from the vendor, accounts payable will conduct a three-way match and triangulate the invoice to the corresponding purchase order or no remittance is issued to the vendor.

There are situations in which the intent for compliance usurps the ability to govern

• Procurement policy should be implemented if the following requirements are met:

• A key to procurement policy development is to properly assess where the limitations of function intersects with the necessity for compliance and visibility - With a careful analysis of the pros and cons of either approach, an organization can better understand the impact of the communications timing in the effectiveness of policy.

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Requirements Recommendations

Prior Communication of Policy Rules

• Many argue that there is no disadvantage to communicating the policy to ensure that the rules are communicated and are clear prior to having the ability to track and govern them

Ability to Enforce Policies

• If policies are launched without the ability to implement them, organizations run the risk of losing effectiveness

• The inability to enforce a policy prior to launching them sometimes perpetuates the notion that policies are nothing more than mere intellectual constructs of an organization that is incapable of governing

Consequences for Non-Compliance

• One of the main risks of prematurely launching procurement policies is that those who deviate from policy could develop a mentality of “No Compliance, No Consequence” which could be far more difficult to reverse

3. Timing is Everything

Supply management should take the initiative of leveraging the policy to leave a lasting good impression upon the business units

• In many organizations, procurement policies are often the first point of contact between supply management and other business units

• Building a positive relationship with the business units is critical to the success of any supply management organization. It is only through an open and collaborative approach that full transparency between supply management and the business can be achieved.

• As a conduit to the business units, supply management’s policies should focus on the benefits for the business

• Supply management can use the policy to communicate that it can help business units manage their costs, provide visibility and insights into their spend, and minimize any potential procurement risks

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Manage Costs Provide Spend Visibility Minimize Procurement Risks

Business Units

Procurement Policy

Case Study

Procurement Policy Case Study: National Policy Adoption (Strengthen the County Procurement Function)Context:

A public sector organization was facing considerable challenges around the provision of social care services. It faced a growing budget deficit projected to be £65m over the next four years and compounded by policies such as 0% inflation increases to suppliers and assumptions that no temporary staff would be used to back fill unfilled posts. The client was aware it was facing significant difficulties, but lacked the internal resources required to meet these challenges and to continue to operate within its financial envelope.

Objectives:

The procurement work was designed to strengthen the procurement function and fund the change required for policy adoption through quick wins savings initiatives. A Deloitte strategy team was initially contracted to allow the authority to respond to all of the policy, budgetary, regulatory, and demographic challenges.

Result:

As part of this project, Deloitte designed a new strategy for the commissioning of care using the ideas of self-directed support and individual budgets. Our robust approach to the development of the resource allocation system ensures that sufficient contingencies have been built in to the allocation system to effectively manage the financial risks of delivering such a major shift. Shifting to the new system will mean that the council has a far more transparent mechanism to manage its finances. Our projections have identified a range of potential cost avoidance through this system which could be as high as 30 pounds per year, at maturity.

Takeaways:

Through shifting its procurement and budgetary systems to the individual business unit level, the client was able to achieve a 12% reduction in unit costs and was able to regain its status as a three star provider. In addition, the new system has resulted in a far more transparent mechanism to manage its finances.

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Final Thoughts

Procurement policy development and implementation is equal parts strategy and necessity

• Procurement policies can be interpreted in one of two ways - as an enabler or a constraint. Effective policies will enable an organization to reduce costs, provide spend visibility and minimize risks.

• As supply management organizations roll up their sleeves and delve into policy, it is important to reflect on a few simple considerations to ensure that policies are rolled out to minimize resistance and maximize uptake, including:

• Objectives of, and constraints on, the procurement policy

• Risks that might be encountered at each stage in the delivery of the policy

• Complexity levels of the policy necessary for compliance

• Key processes and activities that must be performed for implementation

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