Applied Crisis Management in Procurement
A crisis is a new normal
The definition of crisis
Types of crises
- Immediate crises.
- Crises that appear gradually, slowly created, and can be stopped or restricted by organizational measures.
- Ongoing crises.
Attributes of crises
- Events turn to unexpected consequences.
- The situation demands an immediate reaction.
- The conditions create uncertainty.
- The control over events reduces.
- The available information is severely reduced.
- Pressure and stress for employees and communities mounting up.
A crisis means an opportunity.
10 practical rules of crisis management
The following 10-pack of crisis management rules is only
an attempt to share some practical experience of what worked better upon having
a dozen crises under the belt. Most of these measures are being exercised, as
we speak.
1. Obtain
executive buy-in and help them to maintain the focus.
Usually, crisis elevates Finance and Procurement, and even executive skeptics tend to look at us with some hope.
The worst-case scenario is that the management attention transforms into a "cut 10-15-20% across the supply base" kind of order.
CFO and CPO need to obtain a different mandate: "look for every opportunity, don't leave any stone unturned, challenge everything to deliver value."
Finance and Procurement need to
co-establish the corporate "back-in-black" program chaired by the Executive
Committee and report, engage, and regularly escalate to keep up the momentum.
2. Employ
change management techniques to modify buying behavior.
You would have to change the basics of how people think when they decide to buy something.
To enable a cultural shift, a
full-blown change management effort will be required. Installing a few extra
controls and limiting the spending on travel and entertainment is necessary but
not sufficient.
3. Collectively
define the crisis shopping card of goods and services your company needs to
maintain the lifeline.
Together with end-users, Procurement needs to define the monthly ration required to maintain the operational lifeline. Every other spending should go through extra levels of scrutiny and approvals.
Preferably, there should also be a reasonably large bucket of spending to avoid,
defer or downsize sufficiently until after the crisis or maybe forever, e.g.,
gifts, entertainment, travel, catering.
4. Regularly
analyze results and adjust controls. Not necessarily tighten up screws, as
there is a vast grey area of spending in-between the lifeline and discretionary
one, which cannot be simply eliminated.
The rules applicable to this grey area will be regularly changing according to the situation in the company, on the market, or globally.
A business cannot always postpone capital investments; it would eventually require ad-hoc installation, maintenance, or training.
Extra controls
should not come at the cost of business continuity or customer satisfaction
(your salespeople cannot always bring just a handshake to VIP meetings.)
5. Demand management in times of crisis.
A firm should look further than limiting the optional expenditures, usually related to routine office operations. They need to segregate the value demand from the wasteful one and eliminate the latest tirelessly.
Usually, this requires the complete
decomposition of business processes across the company instead of just
cutting some utilitarian demands.
6. Crisis management by effective use of savings
Procurement must avoid reporting on false savings, which
are not helping the company to overcome a crisis by implementing several fundamental principles of savings management:
- savings are measured against the budget;
- there's a distinct bucket of savings applicable to the current fiscal year (hard or cash savings);
- reporting is approved by financial control;
- benefits realization is monitored based on actual consumption (not forecasts!);
- approved savings of the current fiscal year is deducted from a respective business unit's budget.
7. Don't manage the crisis at the cost of suppliers.
This rule is a champion of all don'ts.
Many companies tend to suppress their suppliers instead of looking at their own business to generate new revenues or change failed practices and behaviors. 2-3-5% of extra discounts at the cost of backstabbed partnership could be easily replaced with up to 100% savings from eliminating wasteful needs.
Suppliers cannot always be the sole source of efficiencies and patch holes in your company's balance sheet with their funding.
8. Don't only save - earn!
The crisis triggers creativity in many people, and they realize that smaller ancillary revenues are falling off the radar.
- Sub-lease of small office spaces that became vacant due to rightsizing,
- revenue sharing with allied businesses (e.g., visa services or travel insurance for airline passengers),
- revenue-generating BPO (e.g., onboard duty-free or inflight catering, which used to generate dead stocks and required constant cash gets outsourced at a regular premium),
- and, of course, marketing partnership.
9. Don't
think everyone understands the crisis and cares for the company's
survival.
Being in the heart of a hurricane and feeling how the business's shaking gives everyone the same experience.
No, many of your colleagues do not. Instead of a Skype session, they want a new laptop, a relaxing business trip, or a roaming call.
HR, Finance, and Procurement need to champion the change, persuade, challenge, and force those who object to the new reality.
1 Don't dismantle working controls when the crisis is over; adjust them to the new
normal.
A turmoil would not stop overnight; it assumes a long and challenging recovery, during which Procurement needs to implement systemic changes based on temporary relief from a corporate rescue program.
Simply getting back to legacy practices means attracting a new crisis.
Bonus section: 6 mistakes to avoid when managing a crisis.
Top-down budgeting
Whenever a top-down budget is forced on the business, they have to trim, spread, and conceal "just-in-case" funding.
As a result, some programs get under-budgeted. Somewhere else, there would be buckets of "last resort" cash to patch holes ad-hoc.
No-budget sourcing
Recall the times of running sourcing projects with no budget indicated in a requisition, as the funds come from those "maverick" buckets not belonging to any particular program?
End-users may not have known the subject (e.g., a bespoke technology platform or unforeseen extension of project resources), and Procurement may not have bothered with a cost estimate.
The end result? You buy a black cat in a dark room by following a sourcing strategy (if any) that is not worth the paper it is printed on.
Self-praised air savings
Procurement sometimes claims fluffy savings that were never reflected in the budget (as there was no dedicated budget!)
Some cynical colleagues may even praise themselves for outstanding achievements by comparing the first and last offer or similar. Gradually, the company develops a perception of Procurement as an all-purpose cost-trimming instrument.
In fact, there was only an act of air trimming with no P&L effect.
Price cuts and extended payment terms "across the board."
When a crisis hits hard, execs start looking for a panacea. Their traditional perception of the anti-crisis agenda is as simple as "cut prices and extend payment terms."
This means: screw the SRM, backstab your partners' suffering, and survive at their cost.
Unfortunately, Procurement rarely objects to such an approach – they bury category strategies and approach suppliers with a sharp knife.
Slap a consultant
As the cutthroat strategy weakens with suppliers' extinction, many companies hire a consultant to power up.
In some cases, they are simply looking for a scapegoat to blame for the savings target's underachievement.
Interestingly, consultants know this game's name and accept it, just adding the "scapegoating" price tag to their offers.
Right-shape, right-size
Management looks around savagely when suppliers barely breathe, and consultants have been kicked out in disgrace.
The time of the "right shape, right size" program, where the high performers (and top payees) leave the company.
Nevertheless, a beheaded body is still expected to perform with double productivity.
Completing the crisis cycle and rising from the ashes
After the crisis, a company attempts to rise from the ashes with a new transformation program intended to optimize, motivate, and energize the survivors. Will that be the termination of a disaster cycle or the beginning of a new loop?
The sooner in the cycle, the better the management recognizes these dynamics and makes a change.
The further around the company's loop, the other the business will fall – a loss that only lengthens the journey to strategic relevance.
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