Nudge Theory Applications in Procurement

Nudge Theory

Nudge theory, developed by Richard Thaler and Cass Sunstein, subtly encourages individuals to make better decisions without limiting their choices. It leverages behavioral science to predict behavior by altering the environment or context in which decisions are made.

It logically derives from the Prospect Theory we discussed earlier. 

Nudges are small interventions or environmental changes that steer people towards desired behaviors without restricting their freedom of choice. 

Main attributes of nudges

Freedom to Opt-Out: Individuals can easily opt out of the nudge or choose an alternative. Nudges are non-coercive and maintain freedom of choice.

Simplicity: Nudges should be simple and easy to understand. Complexity can lead to confusion and reduce the effectiveness of the nudge.

Transparency: The intent behind the nudge should be clear, ensuring that individuals are aware of the influence without feeling manipulated

Alignment with Human Behavior: Nudges leverage natural human nature and cognitive biases, such as the tendency to follow default options or the influence of social norms.

Cost-Effectiveness: Implementing nudges should be low-cost compared to other interventions, making them an efficient way to influence behavior.

Ethical Consideration: Nudges should aim to benefit the individual or society and not exploit cognitive biases for harmful purposes.

Feedback and Adaptability: Effective nudges often include feedback mechanisms, allowing for adjustment based on how individuals respond to the nudge.

These attributes ensure that nudges respect individual autonomy while effectively guiding behavior in beneficial ways.

Some applications of Nudge Theory in procurement

Nudges can make procurement processes and governance less disturbing for end-users and contribute to value creation. 

Requestor Portals: A Guided Experience

Let's imagine ourselves as our end-users. They need to understand and appreciate procurement governance. Often, they must buy stuff as soon as possible with minimal involvement. 

When engineers or salespeople start raising PRs, writing RFP requirements, or chasing payments to help out their suppliers, they'd better do something job-related and generate revenues or design new products.

Arguably, the most disturbing for them is to travel the Schwarzwald of multiple procurement scenarios and options. What if we established a Requestor Portal, carefully guiding them through buying channels and providing self-service opportunities. 
Requestor Portal and buying channels

Procurement KPIs

We often report metrics like savings, cycle time, or inventory turnover. However, the true impact of procurement on the company's overall performance must be evident.

While in the aviation industry, I observed a critical corporate metric: CASK (Cost of Available Seat Kilometers). Along with profits (when applicable), our airline watched CASK and the load factor to ensure our aircraft were full of passengers at an optimal cost. While we couldn’t control the load factor, we certainly influenced the CASK.

What if we defined meaningful corporate KPIs that better showcase procurement's contributions? For example, consider how your actions impact key business metrics like CASK instead of focusing solely on savings.

Decision Simplification Through Defaults

One creative nudge could involve setting default options in procurement processes. 
For instance, when initiating contracts, a default duration could be set based on the most cost-effective timeframe. This slight nudge leverages users’ tendency to accept defaults, simplifying decisions and ensuring better alignment with procurement goals. 

Standardization and harmonization

I admire this example from IAG. Procurement was instrumental in the airline group's survival by promoting standardization, which nudged companies toward synergies that are difficult to achieve through management alone.

What other creative applications of nudge theory in procurement can you think of?

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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s hours spent on research, analysis, and content creation for the most demanding professional readers.
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