The art and science of using information to improve negotiations in the private sector
Our roundtable participants from left to right: Peter Buscemi; Boris Tsinman; Rod Sherkin; Stephen Davies; Lisa McLaughlin; Terry Kyritsis; and Edward Jin (via conference call).
For procurement professionals, information about the products they buy—market intelligence—goes hand-in-glove with negotiations. They must track market forces, develop in-depth knowledge of commodity prices and keep an eye on labour costs. In a private company, this intelligence can give procurement the knowledge needed for negotiating the price it should be paying. But what about the public sector? Are public sector professionals taking full advantage of this information? If not, where should they look for such data.
To grapple with these topics, PurchasingB2B partnered with ProPurchaser for a roundtable discussion at the Westin Hotel in Ottawa to explore how public sector procurement can use market intelligence to improve negotiations. The discussion set out to illustrate tools that help procurement move from gathering information to using that intelligence to seek the best price openly and transparently.
Participating in the discussion were: Terry Kyritsis, president and CEO of the Ontario Education Collaborative Marketplace; Stephen Davies, president of Alba Consulting; Rod Sherkin, president of ProPurchaser; Boris Tsinman, joint director of procurement and supply chain for Lakeridge Health and the Rouge Valley Health System; Lisa McLaughlin, material control manager for Home Hardware; and Peter Buscemi, strategic procurement specialist at Manitoba Hydro. As well, Edward Jin, director of procurement at the University of Toronto, joined the conversation from Toronto via conference call while PurchasingB2B editor Michael Power moderated the session.
The group first worked to define “market intelligence”. For Tsinman, the term meant procurement’s knowledge of the product. “You have to really know the product, the services or the price at which you’ll be buying,” he said. “Market intelligence means gathering information from different sources in order to identify opportunities for procurement or for supply chain negotiations.”
The terms involved understanding who provides goods and services, what the current conditions are as well as the end-user’s situation, said Kyritsis. “When do they need it? How do they use it? What are the opportunities to align the supply with the consumption so you can come up with the best possible value?” he said. “The key component here is information for decision-making.”
Knowing global markets and what’s happening among vendors helps capture valuable information, said Sherkin. “The vendor community, if it’s a global market, are they already in other markets from yours that are starting to take on their capacity, which can then assist you when you’re negotiating?” he said. “It’s understanding what’s going on in the world.”
Sending out RFP’s allows the public sector to tap into what’s going on in the market, said Edward Jin. The formal RFP process therefore allows for the mining of information. “I think that may be a slight difference in terms of how the private sector may have to do things,” Jin said. “We naturally ask the market to provide us all sorts of intelligence.”
Price adjustment clauses
Despite differences between how the public and private sectors gather and use information, they also share methods. Tools such as price adjustment clauses—when one or both sides in negotiations can regularly petition for an adjusted price—were not uncommon among roundtable participants.
The Ontario Education Collaborative Marketplace currently has 52 agreements, Kyritsis said, with 51 of them using such clauses. With technology changing often, adjustments are necessary not only on prices but also components of the specs for computers, laptops or tablets, he noted. “There has to be a win-win,” he said. “In our case, there has to be a win-win-win, because we’re in the middle and we want to make sure our suppliers are continuing to be viable and providing good service. We want to make sure our customers—school boards, colleges and universities—get the best possible value.”
Buscemi and Tsinman also noted their organizations used such clauses. Tsinman said the healthcare sector, which buys everything from fruit to MRI machines to asphalt shingles, deals with a breadth of commodities. Tsinman deals regularly with many companies and often digs into those contracts. His organization removes escalation clauses and replaces them with a consumer price (CPI) adjustment.
Adjustments must be made when purchasing goods from the US and Europe due to currency fluctuations, Tsinman said. If the dollar goes up, the price of an imported good is adjusted accordingly. “If the dollar goes down five percent we’ll adjust it back down. Otherwise it’s an uneven playing field.”
McLaughlin said her organization works to learn suppliers’ cost structures and main cost drivers while keeping in mind that what goes up comes down. “When propylene goes through the roof and drives all of your costs significantly higher than you thought, you know that it’s going to drop. So you get your supplier to roll their prices back. It’s a constant dance of give and take, of making sure everybody is as transparent as possible and that you’re getting the best deal for your money.”
To benchmark those prices, Home Hardware uses three data sources for each item. For example, information from ProPurchaser, a chemical trade magazine and a third independent benchmarking tool should all rise and fall in unison, she noted. “When something is out of whack you just pick up the phone and find out the reason.”
Approaching suppliers themselves for data is also important, noted Kyritsis, who said his organization routinely does so before sourcing. The organization spends time upfront learning about a supplier’s business, as well as that of their customers. “Our customers are all in the business of education and they all do things differently, for very good reasons. One measure doesn’t fit all. We do a lot of that work up front, both from the suppliers and our customers, before we start to put pen on paper to write the specs of an RFP.”
Public sector practitioners should avoid limiting research to one or two suppliers, said Buscemi. That can mean the risk of incorporating a technology or product while shutting out other opportunities. “If you’re tightening your specifications to that product, it’s going to limit your other markets and may force you into a single source situation that may cause challenges down the road.”
The University of Toronto has two “buckets” of goods and services, said Jin: one that covers non-specialized products and another covering specialized products researchers need, including items such as rocket launching services. The procurement team has begun a new program introduced in 2010 called the negotiable RFP (NRFP). Negotiations in that program include asking the supplier about their pricing model, their profit model, what their logistics is like and what their costs and overhead are. His team looks at that information when the price of a product changes, Jin said. The process allows the university to negotiate the final details prior to award.
“It allows us accommodation to utilize the market for the market intelligence,” he said. “The NRFP has the wonderful nuance to allow us to refine the conditions before we partner with any supplier.”
Sherkin noted the similarity between the University of Toronto’s NRFP model and other pricing models. ProPurchaser has about 11,000 simple models on its website, mainly built by those in the private sector, he said. If an organization is buying a fluorescent light fixture, for instance, the purchaser would look at the price of items such as steel for the housing, copper for the ballast and perhaps glass. Those figures are combined with the supplier’s profit and overhead.
“For most things that are physical that you buy—chairs for board rooms and playground sets if you work for a school board—those things are easy to model,” Sherkin said. “We’re finding, by far, the most popular tool on our website are those models which seem similar to the NRFP concept where you can go back to a supplier and say “hey, steel is down 20 percent this year and that’s 10 percent of your cost. I want a two percent reduction on the price of your whole. You’re still making the same margin, the same absorption of overheads.”
Kyritsis noted that the Ontario Education Collaborative Marketplace had taken commodity price information to suppliers, especially when reviewing pricing. When a supplier asks to increase a price due to such fluctuations, Kyritsis said they ask for documentation and research how the commodity price has changed. “We may agree with them, we may disagree, or we may land on a different price altogether,” he said. “If the commodity has gone down we’ll try to negotiate those prices down.”
Developing proper relationships with suppliers is key for such discussions, said McLaughlin. Once that trust is established, a supplier may suggest a price decrease based on changes to commodity prices.
“Picking up the phone and letting us know that the feed stocks have dropped and we’re going to roll prices back—when that happens you’ve identified a preferred supplier,” she said.
While building relationships with a supplier is important, they can be challenged if another supplier offers much lower prices, noted Kyritsis. Public sector procurement may have to defend their decisions to elected officials.
“You get into a situation where an unsuccessful bidder will approach the Prime Minister, the Premier or the Minister of Health or Finance and you end up spending your time trying to defend the right thing,” he said. “Those are the challenges that, perhaps, you don’t have to the same degree in the private sector.”
Stephen Davies also stressed supplier relations. One large company allows him to check their supplier invoices during audits. “That’s come about through the relationship,” he said. “In saying that, because of the relationships we have and all the different suppliers, I’ve never, ever had to do that—I’ve never felt the need to do it.”
While he was a procurement professional, Sherkin said his team built costing models—with percentages for commodities, labour, energy and transportation—knowing they were slightly inaccurate. They’d then ask for feedback from suppliers, who would correct the model by providing accurate percentages.
“We wound up with a model that was simple, but more importantly, it was shared and owned by both parties,” Sherkin said. “We weren’t imposing it because the supplier contributed. It took a lot of the acrimony, hassle and time-wasting out of negotiations.”
Tsinman tries to calculate the complete cost of taking a raw material and producing a product. For healthcare, procurement considers costs associated with transportation, mining a raw material (like polymer for gloves), manufacturer profit margins and so on. An organization’s internal costs, overhead costs from government ministries and other added-ons must also be considered.
Buscemi stressed looking at the overall situation—including associated costs—rather than simply the price tag. Focus first on the best value for the organization, he advised. “That’s where we can start getting into the bigger picture rather than just a smaller picture,” he said.
That transparency into what suppliers’ true costs are provides the foundation of trust between buyer and seller, Sherkin said. Once the price is set—for example through a previously agreed upon pricing model—both sides realize they’re getting the best value. They’re then free to focus on other areas of the business or relationship. “If you want to get to these situations where you’re working with excellent suppliers and you’re working on exciting new developments, you need to have the pricing nailed down,” he said. “You don’t have to worry about it; it’s on automatic pilot.”
Tsinman warned against assuming a contract can be filed away and forgotten once the ink dries. Managing the contract during its lifecycle is also important. “The truth is, if you don’t manage the contract you’re going to lose every penny you think you saved,” he said. “We’ve got a very strong emphasis on contract management, which means being involved at every stage.”
One challenges in terms of employing business intelligence lies in employee education, said Kyritsis. Procurement professionals must be trained to interpret and use business intelligence, as well as be savvy with the technology needed to take advantage of business intelligence. “The challenge for me is, how do we build the expertise to take advantage to make those right decisions?”
Many procurement organizations have moved towards doing more with fewer staff, said Tsinman. That has meant skill levels among recent recruits don’t always match what’s needed to properly employ market intelligence. “Are we getting enough educated staff to take advantage of commodity pricing or business intelligence?” he asked. “I have a hard time finding qualified people.”
Proper education involves ensuring procurement has a seat at their organization’s top tables, said Davies. A hospital may decide to reduce costs. The institution’s executive then tells materials management “you weren’t at the table, but we want to cut five percent.” The director is then able to get dressings at, for example, $4 rather than $5.
“Materials management then comes out with a really good variance at the end of the year but nursing has been hit because they need to change the dressing three times a day rather than once. So if procurement isn’t at the table there’s an issue for the organization. That’s what I think has been left out for years.”
Organizations would benefit by not viewing procurement as a cost centre, Davies noted.
“Maybe that’s the institute doing some more ROIs and getting the ability to be at the top table where you can see quite clearly how being able to explain to the people within a department what’s happening is worth more than keeping them in the basement and drilling down from there.”
Buscemi agreed procurement needed a profile within organizations. As markets become more global, procurement will see more constraints—whether political, financial or environmental. “As supply chains we have an opportunity to step up and assist our organizations reach their goals and bring value back to our organizations.”
McLaughlin agreed procurement impacted profit margins. She reiterated the importance of speaking up so organizations realized that every dollar purchasing saves goes to the bottom line. “We also have that great opportunity to educate our suppliers to how we want to conduct business to bring objectivity and transparency to the table—and that’s pretty important.”
The roundtable investigated if public procurement could benefit from tools like indexes and pricing models. It appeared the public sector could indeed use them, but with caution and transparency. Sherkin concluded the discussion by noting that it was heartening to hear public sector people say they could use such tools, although it’s tougher, more complicated and political. “I’m sure that’s true,” he said. “If it were easy you wouldn’t be there. But it sounds like it’s possible.” b2b