July 28, 2005
Avoid, reduce or pass the buck on procurement risk... (Part 1)
Clever suppliers will plan to introduce risks after you've entered a into contract or started a project. As part of a "foot in the door" strategy, they might be the lowest bidder initially but with a deliberate plan for increasing costs once the "Balance of Power has shifted"....
A good example of this is in outsourcing contracts / projects. The supplier knows that once the buying company has given over management responsibility to the supplier, the negotiating power has shifted in the direction of the supplier. If the supplier planned its strategy carefully, this would be a good time to start introducing risks / costs that the buyer never though about earlier...
In our previous article, we discussed the first major reason why Procurement projects / contracts fail... The second major area is that of managing risks.
The graphic below indicates that the ability to influence risk is the greatest at the planning stage. It is also here where it costs the least.
On the other hand, as time moves on, the ability to change the outcome of the contract is greatly reduced while the cost of doing so greatly increases.
Sophisticated suppliers bargain on this trend to renegotiate with their customers who did not plan properly. (Rather naughty of them!)
STEP 1: Is to develop a clear understanding of the potential risks throughout the lifecycle of the item /project:
Just as in the strategic sourcing process we would map the lifecycle of the item and identify costs throughout the lifecycle...we need to do the same for risks throughout the project / contract lifecycle.
The Lifecycle can be described as from the moment an item is needed until the time it is disposed of.
The first question to ask is: What do we require, throughout each phase of the lifecycle of the contract / project?
This research can be categorised as follows:
A. What we have at the moment that we would like to keep. (These are typically things that we would like to retain. A good example of this is the concept of "Flexibility to change suppliers". A potential risk would be "Becoming locked into a single source")
B. What we don't have at the moment but would like to have in the future
C. What we have at the moment but do not want
D. What we do not have at the moment and would like to avoid in the future.
Once we've mapped our requirements throughout the lifecycle, the next question is: What potential risks are there at each step of the lifecycle?
Here follows a ticklist of sample risks that you might want to consider at each stage of the lifecycle:
- commercial
- financial
- operational
- legal
- production/manufacturing
- quality
- labour
- environmental
- client satisfaction etc.
It is a good idea to get other stakeholders involved to look at the lifecycle as defined above, and to brainstorm with procurement about potential areas of risk.
In my next article, we will be dealing with methods to analyse and classify risks as well as specific Risk Management Strategies.
(Thanks to Julian Curtiss for his assistance in compiling this article)
Regards
Bernie van Niekerk
Posted by Bernie at 08:36 AM | Comments (0)
April 12, 2005
Famous or Notorious? Why Procurement Projects Fail
There's a "slight" difference between being notorious and famous... Succesful procurement projects can lead to being famous for the right reasons. But being notorious for spectacular project failures, leads to fame of the unwanted kind...
Statistically, the chances are better that your procurement project would lead to notoriety. Look at some of these figures:
Project Delivered but never successfully used 47.50%
Not delivered but paid for 29%
Used briefly then abandoned 19%
Used after extensive modifications 3%
Used as delivered 1.50%
(Report by the Controller General to the US congress on 9 multi-million dollar software projects)
In fairness, not every project will have these type of statistics but lets look at some results closer to the procurement environment. Taking e-Procurement as an example, right now many companies are starting to experience e-procurement successes.
However a year or two ago ago MOST e-procurement marketplaces AND e-procurement software providers closed down, leaving their customers in the lurch.
Many companies in many countries invested millions in procurement technology only to now replacing or phasing out these solutions.
Many senior procurement professionals have been severely embarrassed or "severely fired" as a result.
If buying companies had properly analysed risks (as very few did) they might have noticed that while these vendors had very high market values their intrinsic sustainability was questionable. The essential ratios that define whether or not these companies could make it on a sustainable basis were out of line but very few people made these calculations.
This fits into the topic of Risk Management within the procurement project environment, which will be the topic for our next article.
1. Lets look at some communication issues first:
Ineffective communication leads to the following project issues:
1. Important work is omitted or duplicates are created during the project planning stage
2. Managers / key stakeholders are unprepared
3. Interdependencies between projects / interventions are not identified
4. Programme leaders are unaware of major risks
5. Lack of commitment from major stakeholders.
These ultimately lead to cost increases, risk increases, delays and unrealised benefits.
Effective project communication begins with having a formal communications plan / programme.
This programme communicates UPWARD and OUTWARD to gain support from those who determine project success and create external dependencies.
It also communicates INWARD AND DOWNWARD to the project team. This builds project team understanding and manages internal dependencies.
The Communications plan for the project can be developed using the following 5 steps:
1. Who are the stakeholders? Brainstorm around all stakeholders that:
a. could influence the success of the project,
b. are to be influenced by the project
c. are watching the projects progress from the sidelines
2. Rate these stakeholders according to:
a. how critical they are to the project success
b. the impact of the project on them
3. Determine your communication strategy per stakeholder grouping:
Various communication strategies are then planned depending on the nature of the stakeholder. These range from merely keeping them informed to closely monitoring and responding immediately to their issues. A key strategy to top management is "Maintaining Confidence"
4. Consider what type of communication would be appropriate per stakeholder strategy. These include:
a. spoken word such as: Briefing by top management, line management, one on one communication
b. informal: Grapevine, informal e-mail, discussion databases, project open days etc.
c. written Word: Terms of reference, Newsletters, Briefing Notes, Formal e-mails, Bulletins and notices.
5. Create the plan itself which will include heading such as:
a. stakeholder grouping
b. purpose of the communication
c. who is responsible for doing the communication
c. amount of focus on listening
d. amount of focus on talking
c. format of the communication
d. regularity of the communication.
Prepared By Julian Curtiss and Bernie van Niekerk
Posted by Bernie at 08:50 AM | Comments (0)