Article 1 of 3 aligned to the core themes of Survive, Revive and Thrive
A GUEST BLOG: by Laura Grant (Virgin Atlantic) and Oliver Mountain (Revive Consulting)
Survive, Revive and Thrive
Procurement has never been better positioned to effectively impact the 3-phases of the global impact of COVID-19
Procurement Leaders across the globe have been presented with an exceptional opportunity to pique the interest of the Board – never should such an occasion be wasted to raise the profile of Procurement organisations that have, and continue to play, a pivotal role in how a business effectively responds to COVID-19.
Revenue generation and growth, of course, will always be a priority for any business, however, for many industries and sectors (including my own), we find ourselves in an environment where demand has been suppressed beyond anything ever expected.
Very few businesses will have foreseen the impact of a global pandemic the size and scale of COVID-19. We have seen similar events before – SARS, MERS, Avian Flu – but none have had the devastating effects of COVID-19 on both businesses and human-kind alike and for as long.
How businesses SURVIVE, REVIVE and then ultimately THRIVE, following this extraordinary event will depend on their Commercial adaptability to a changing world and their “agility” – how quickly can a business move, albeit in incremental steps, whilst the new world unfolds?
Procurement has never been better positioned to effectively impact these 3-phases of the global impact of COVID-19. So how can Procurement functions noticeably enhance phase 1 – SURVIVE?
Procurement – Front Line Comrades
Every modern business relies heavily on a range of product and services being provisioned by third parties; therefore, it should come as no surprise that when a Supplier fails to deliver on a critical service / product, a business may find it difficult or impossible to operate.
Never has a greater lens been placed on those Suppliers who underpin, protect and support the Supplier life cycle; Procurement, who are often the functional anchor that Supplier relationships adhere to, should be fully exercised as the comrades of the business to bestow their skills and commercial acumen at what can be considered a critical juncture.
The 4 Procurement Steps to aid Survival
As demand becomes suppressed and revenue generation is a distant memory, Procurement should be engaged to enable great commercial outcomes.
How organisations react and respond will take many different forms (navigating the crisis vs using the crisis) as detailed in diagram below (McKinsey. COVID-19: Implications for Business, June 18, 2020), yet the initial approach will be similar.
The 4-Step Framework outlined below demonstrates how Procurement can be multi-faceted and pliable in its sponsorship and should not be overlooked during this extra-ordinary event.
1. Understand the impact of the event on the business strategy / operating model
Before any Supplier segmentation can begin (or be revised), Procurement must be fully engaged on what critical steps the business is looking to take to counter the event; stakeholder collaboration at C-suite level and below, is “crucial” at this stage to ensure a common understanding and holistic approach are taken to aid Survival across the organisation. Key questions should be asked that will support the Procurement survival approach:
- Has the event changed the organisational strategy and / or operating model?
The impact of a global pandemic may result in the business changing its strategy, or operating model. Whether this is an essential survival tactic, or an opportunistic one, to optimise any short- and long-term commercial arrangements, Procurement will need an awareness of these strategy changes from the outset and the associated timescales.
- What are the key business metrics the organisation is trying to protect and how are these prioritised?
During this uncertain time, businesses will have a clear view on what key business metrics they are seeking to protect – cash, reputation, future revenue? This knowledge is critical for Procurement; targeted negotiations, laser focused on the areas that are going to drive the best outcomes for their business (that aligned to the altered strategy), will then prevail.
- How long does the business envisage the problem continuing for?
Any potential scenario planning should be shared with Procurement; information pertaining to the timing of suppressed demand and any ramp up will have a significant impact on relationships and any forthcoming negotiations.
- What critical services / products are needed in place to efficiently protect and support the existing or revised operation?
An engaged and immersed Procurement team will have a thorough understanding of what “key services / products” are required to ensure the operation can function. However, with the potential for a revised operation, this should be reviewed and any information pertaining to Suppliers of these categories immediately updated.
- What can we do without? Can trade-offs be made?
Most organisations can differentiate their product offering into different categories, such as -essential, critical and/or differential.
At such times, appropriate challenge should be upheld as to whether this differential offering to the Customer is relevant and necessary.
2. Supplier Segmentation
Supplier segmentation, irrespective of a global pandemic, is an essential tool in the armoury of its Procurement function, however, in such an event as COVID-19, it becomes even more vital. Indeed, this is an apt opportunity to refresh your segmentation, against new key risks. An experienced Procurement professional should be looking to address the following:
- Utilising the Procurement Toolkit. A standard Portfolio Analysis can play its trump card here, quickly and simply enabling the Procurement team and business to understand areas of weakness and opportunity to devise Supplier strategies.
- Negotiation Strategy. A “one size fits all” approach for all Suppliers cannot be used – not in this instance, not ever. Dependent on the nature of the relationship of the Supplier to your business and the service and/or product they provision, either a carefully crafted negotiation will need to take place, with the right level of support from business areas and key stakeholders, including Executives in some cases, versus a more light touch review.
During this Supplier segmentation stage, it is of paramount importance to cross reference against any changes to the business strategy, the prioritised business metrics and new key risks.
3. Supplier Financial Risk and Controlling Costs
When demand is suppressed, many organisations will be looking to preserve cash – and Supplier’s will be no different.
To augment their own financial position, Suppliers will require payment when due and may even look to decrease payment terms or ask for monies in advance if an they believe the organisation, they provide services to, is in financial difficulties.
Procurement, working alongside the business and Finance must navigate this situation extremely carefully and with the utmost respect to the supply base. As initial first steps, Procurement can assist in providing the levers for cash preservation:
- Supplier Segmentation: Ultimately understanding your “critical and strategic” Suppliers will help prioritise any payments owed.
- Understanding fixed and variable costs: For those Suppliers considered strategic or critical to the business, a clear view on the financial make-up of the Agreement should be available and understood – by this, we mean the fixed and variable costs.
When demand is suppressed, by their very nature, variable costs reduce. This is not the case for fixed costs. Understanding how exposed the business is to these ongoing fixed costs is fundamental to once again ensure any negotiations are targeted for maximum benefit.
- Contract Knowledge: The current Agreement in place may allow a Procurement team to take advantage of the previously negotiated position. Where possible and if appropriate, there may be an opportunity to suspend or even terminate an Agreement to preserve cash on products / services no longer required. There may be an opportunity to review and change SLA’s and / or the products and services being delivered.
- Financial Risk Assessment: Suppliers should be financially risk assessed based on their criticality to the business. Many organisations suffer from knowing little about the financial state of their key Suppliers – if a Supplier risk register is not in place, never has been a better time to implement one. Financial software tools can be used; however, these are often out of date in terms of relying on historical data, which may not take into consideration their current situation. Supplier engagement becomes more important and powerful in these situations and this is addressed in the next section.
- Supplier “Sixth Sense”: Less tangible to measure, but potentially pivotal, positively or negatively.
There will be Suppliers who are not necessarily considered critical or strategic, however, can create issues, or instead provide unequivocal support. Issues that can arise may be reputational damage (either by a Supplier going to the press, having a high social media following, or they are a small business that has been left “hung out to dry”) or they have been accidently overlooked. In contrast, these Suppliers can provide innovative opportunities that may in fact move them upwards and to the right in a Portfolio Analysis. Having a “sixth sense” on any potential Suppliers who may be useful, or obstructive is useful information to have to hand.
4. Supplier Engagement
The 3 sections preceding the Supplier Engagement section are important – they provide outputs relating to data, analysis and contractual documentation to support decision making. However, none is more important than how the decision made is executed – Supplier Engagement is critical.
Any discussions held with Suppliers during this time should always be relevant and meaningful, and never punitive or threatening.
Old school tactics in Procurement do not work in this scenario, and neither should they. This is a time when Supplier’s and Customers alike should be collaborating and innovating to jointly seek beneficial outcomes.
Consideration should be given to consolidation, dual-sourcing and innovation during this process; in some cases, Agreements will be terminated with Suppliers, and implemented with others. However, through it all, for those Suppliers that are critical, strategic, vulnerable, risky from a reputational standpoint or will be needed when demand increases (even if not immediately), the following guidelines should be followed:
- Always ensure the business, stakeholder, and in some cases, Exec-buy in, on any negotiation strategy with strategic and critical Suppliers.
- If terminating or suspending an Agreement, communicate this effectively and fairly, outlying when any monies owed will be paid – and stick to this.
- Do not naturally assume cost reductions at this time, especially in a suppressed demand situation – a bias towards a “pain / gain” approach with Suppliers may be more prudent and palatable. Reduced rates for a period can be implemented, with an agreed cost increase when demand returns. Payment holidays can also be considered, leading to an extension of the Agreement so the Supplier can recoup costs later.
There are multiple different ways to frame this discussion, however, any dialogue should employ a high level of emotional intelligence which is likely to result in a more positive reaction to the crisis, bearing in mind, in most situations, every Supplier and Customer will have significant concerns regarding cost.
- Innovate – is this an opportunity to rescope / re-engineer the service and / or product to create value, whilst reducing costs? Supplier’s are best placed to assist in this.
- Follow up any discussions with a clear arrangement in place, that will be re-visited in due course.
Summary
COVID-19 will no doubt be a story of 2-halves for organisations across the globe – there will be businesses that survive and prosper, and those that will unfortunately fall foul of this global pandemic that is changing our world.
How businesses utilise their people and functions and respond to this event is essential to their long-term success.
Procurement is a significant business partner to any organisation, however, never has their commercial insight, knowledge and engagement been more needed to ensure not only business survival, but recovery.
Procurement professionals must use this opportunity to showcase their amazing Commercial ability to influence, build trust with key Suppliers and drive great commercial outcomes to their organisation that will not only lay the foundation for their own future, but allow Board members a momentary sigh of relief!
Laura Grant
Laura Grant has previously been the Vice President of Procurement & PMO at Virgin Atlantic.
Having successfully transformed the team and perception of Procurement at all levels within the organisation, the significant change led to a CIPS Award for “Most Improved” Procurement Team.
For the last 12 months, Laura was selected to lead a Strategic Portfolio of Initiatives across Virgin Atlantic and Virgin Holidays to transform and deliver against the long-term strategy. Reporting into the Virgin Atlantic Leadership team, Laura was responsible for the delivery of significant financial benefits and process improvements.
Laura will be leaving Virgin Atlantic in July and can be reached via LinkedIn.
Oliver Mountain
Oliver is a Director of Revive Consulting who specialises in Strategic Procurement, Cost Optimisation, Process Optimisation, Strategy and Organization, Supplier Management, Third Party Risk Management.
