How NOT to Follow a Strategic Sourcing Process by Kelly Barner

I recently wrote an article for the ThomasNet Procurement Journal about the dangers of following the strategic sourcing process too closely. As well intentioned as any process is, over time, it is not uncommon for it to stand in for the THOUGHT process.

We’ve all made the mistake of forgetting to think outside the lines, especially under time pressure and with resource constraints. But what if you are following a process so closely that it causes you to do the wrong thing? When we put all of our trust into a system and stop evaluating each opportunity in the moment, we become cogs in a tactical operation. After all, if you are just checking the boxes, you can easily be replaced by a lower cost resource.

A perfect example of this mistake recently took place in Boston. According to the Boston Herald, the Massachusetts state lottery commission just awarded a contract for $5 Million in advertising services. Like many public sector agencies, the lottery commission has diversity targets and required that a portion of the work be sub-contracted out to a minority or woman-owned supplier. All proposals were evaluated on cost and presentation as well as the diversity requirement.

The contract was awarded to a firm that did not earn the highest score for cost or presentation but did commit to sub-contract $12,000, or 0.24% of the work to a woman-owned supplier. As a result KHJ Brand Activation, another firm that participated in the bid, is suing the lottery commission. Not only did KHJ earn the highest score for both cost and presentation but they are a certified woman-owned business themselves. Had they been awarded the contract, 100% of the $5 Million would have been awarded to a diversity supplier and the state would also get a better result for less money.

When asked why the commission made this decision, Alex Zaroulis, spokeswoman for the Massachusetts Department of Administration and Finance said, “All businesses seeking to be a vendor to the commonwealth must complete a Supplier Diversity Plan. KHJ did not submit a supplier diversity plan and therefore scored lower than the firm that was selected by the Lottery which did fulfill all the bidding requirements for the Lottery contract.” (Boston Herald, July 8 2013).

To any procurement professional who has run a sourcing project, here is the likely scenario: KHJ assumed the state would give them credit for being woman-owned (let’s give them the benefit of the doubt and assume they submitted proof of their certification) and therefore felt the diversity form did not apply to them. They made two mistakes: making the assumption and not filling out the form anyway.

But the biggest mistake was made by the person running the bid process.

Question: Did all participating suppliers submit all of the required paperwork?

Question: Did you read all of the proposals to ensure you understand the value proposition of each supplier?

In this case, the answer to both questions was no.

So much time is spent discussing how procurement can ‘add value’ to the enterprise, whether it is a corporation or a public commission. In this case it would seem that a huge opportunity was missed – even if you assume the procurement organization is selfishly motivated to meet their own performance targets. Awarding the contract to KHJ would have resulted in more savings and more spend towards their diversity target.

Often, procurement spends as much time ‘creating’ qualified proposals as we do eliminating unqualified proposals. More is more – the more options are available, the more leverage can be used in the negotiation process and the better the final result. We chase down suppliers for missing forms or nag them not to miss deadlines. Of course it is frustrating, and often feels administrative, but it is important work.

Catching KHJ on a technicality was both petty and self-defeating, and raises the question of whether the commission was trying to skirt a requirement to award the business to the lowest cost qualified supplier. Now they have to face a lawsuit and spend taxpayer time and money to justify their actions. Maybe they will be able to settle the matter out of court and reduce the fine they pay. Who knows, it may even count towards their cost avoidance targets.

References:

Joe Battenfeld, Hillary Chabot ‘Female CEO loses Lottery contract for nondiversity’ Boston Herald, July 8 2013.

http://bostonherald.com/news_opinion/local_politics/the_truth_squad/2013/07/female_ceo_loses_lottery_contract_for  

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