Wednesday, 1 June 2011

Can you use bonuses in procurement to increase the use of e-Auctions?

e-Auctions are a great tool to save money quickly and efficiently if used correctly. However, there always seems to be a barrier to increasing their uptake with many procurement departments. Can bonuses linked to savings encourage their use?

Let’s start off with touching briefly on a more fundamental question, are bonuses for procurement staff the best way to motivate the team? Well, most procurement departments don’t have a Royal Wedding to boost morale and encourage drive, if that is what the wedding did for the UK (comments welcome!), so what else can achieve this?

From working at Rolls-Royce many moons ago, it was stated that a 1% saving in procurement gave a 10% increase in profits. From simple analysis you can see the power of procurement. If you make something for £10 and sell it for £11, you make a £1 profit. If you then make it for £9.9 and still sell for £11 then you make a £1.1 profit, a 10% increase for a 1% saving.

Obviously this is an over-simplification but the basic premise holds. In other words, the procurement people are in effect also sales people. During one project of ours looking at purchasing of yoghurt pots for a dairy, a £40,000 saving meant that they effectively needed to sell a million fewer yogurts to make the same return. In these difficult times when sales are tough, it is easy to see why procurement is so high on the agenda. So this brings us to the question, should procurement staff be more driven by bonuses like sales people?

The buyer’s role could be split into 4 areas: strategic, operational, customer-focused (internal) and supplier-focused. For the purposes of this article, we will consider just strategic and operational buyers. Strategic buyers would be those more focused in a central procurement team, for example, who are looking at aggregation of contracts, new product introduction and innovation in the supply chain. The operational role would be more focused on the day-to-day procurement from a preferred pool of suppliers. The strategic role may place more emphasis on savings, albeit sometimes difficult to measure, yet it is quite clear that both the strategic and operational roles would also need to be focused on many other factors. These other factors could include delivery, quality and lead-time, all of which can be measured and have been done so successfully by companies such as Rolls Royce as part of overall performance.

The question is do you always get what you measure? Bonuses attributed to all the aforementioned measures may lead the buyer to be too focused on these attributes and less focused on the relationships. However, you could say the same of the sales force. Salespeople have bonuses and the best sales people do not ignore relationships, as they understand that whilst relationships might have no immediate impact on bonuses, they will in the longer term.

For procurement staff on bonus systems, there will always be those who go for the quick hit and those who go for the more long term strategy. For sales people though, it is easier to give them clear bounds for a negotiation and maximum level of discounts. For a buyer this is much more difficult and if a buyer drives the savings to get a better bonus, they could create real harm for the company, which is why other factors need to be included to avoid this potential pitfall. There is the further difficulty that if you base the bonus on many factors you also need to measure these, which makes the task even more complex.

One example we came across a while ago of getting what you measure was one very large aerospace company that was measuring the number of e-auctions run per annum, rather than the quality or cumulative returns from the auctions. The result was that e-auctions were being run on toilet paper and lawn mowing services for head office just so the numbers could be maintained!

So, what is the alternative? My recent discussion with a procurement and operational director of a customer of ours drove me to think about this. At Market Dojo we make e-Auctions much more accessible to the procurement field. There are many challenges to their uptake but through our professional, easy to use software and approach we can mitigate many of these, although some always remain such as whether or not the suppliers will actively take part, for example. E-Auctions can yield large savings and so are very important as a negotiation tool. Yet how do we increase their uptake and are bonuses the key?

Many procurement managers feel that bonuses go against the profession, as generating savings are just one of many roles. Bonuses might be useful but only as a small factor. From a few discussions with people in the field, there is another solution. It actually seems that the best way to increase the use of auctions is by integrating the systems and processes together. By this we mean the kind of integration where it is easier to use the systems to obtain the results than not using them, so the lazy way of procurement is also the best way. Creating systems that people aren’t forced to use but that people want to use to make their life easier and to guide them through the best methodology is the key. See our article on gamification for more on this.

So we would say small bonuses are ok, linked to many other factors, but in the end make the easy way for procuring items also the best way and the savings will appear without the need to complicate matters with hard-to-measure bonus systems. In other words, integration of e-Auction software to the processes and ease of use will do more for their uptake than bonuses. Savings targets will still be essential though to measure success and offer a target to aim for. If you are going to include a bonus, do try to link them to the whole team’s performance which will encourage sharing and assistance amongst the organisation.

How else could you increase the use of e-Auctions?

The discussion above specifically focuses on increasing the use of e-Auctions via bonuses and savings targets but what are the other ways to motivate procurement professionals to carry out more e-Auctions?

Many people may ask, is this a good thing? At Market Dojo we would obviously say yes, but this isn’t from the desire to just sell more software (honestly!). Auctions are simply vehicles to get from ‘A’ to ‘B’ just like a car. When cars were invented, there was much opposition as they were seen as dangerous. This did not stop car becoming more popular, but the risks were mitigated but putting rules in place to ensure they were driven safely. Now we have many more vehicles on the roads, and yes, some are still driven badly (middle lane hogging!) but on the whole, the benefits have outweighed the disadvantages. We see a similar view point to auctions. Their use can be dramatically increased, with great benefits as long as rules and guides are in place and they are used appropriately.

In many cases the success of the auction, is not just down to the software but a combination of factors.

The comment in the previous discussion is still one of the most important - make the software easy, professional and part of the process and their uptake will increase. But how else can we make the process easier. To answer this we need to look at some of the steps in the process and the challenges they face.

Gathering data can be one of the most painful parts of starting this exercise. Unfortunately there is little we can do here but maybe it is something that your organisation can look at internally. Making the data accessible and in a common understandable format can really help with the analysis and preparation for an auction.

Picking the category and creating documentation such as RFQs are the next hurdles which can be overcome easily through guides and templates. E-Auctions on the whole can reduce a procurement cycle but the preparation time is generally longer as e-Auctions encourage and need tight specifications. There is no wriggle room during an auction. Offering guides and templates for picking the category and creating the documentation will make the process more accessible. At Market Dojo we are very familiar with all these issues and we have encapsulated all our knowledge on this in our guides which can be found on our website.

Our guides on finding suppliers can help with this part of the process but it is still hard leg-work and your organisation can help. Keeping databases up to date with approved suppliers will make this process much easier. Making an auction a success is heavily depends on the liquidity; you need to have capable participants willing to engage with you.

Finally support is the cornerstone to bring this all together. Easy to use software, with guides and templates can make e-Auctions more accessible but there is still the human factor. Good support from people who have done these activities before will be able to help in many ways. Obviously they can point them in the right direction, offer advice but most importantly they can act as a sounding board against fears such as those around participation. This support should also come from senior management giving their approval for the processes to help bring all the stakeholders on-board.

At Market Dojo we try to remove the barriers to entry to make e-Auctions accessible to every member of the purchasing community. We make the software easy to use, provide guides and templates and we also provide the support to help overcome your fears. Your organisations can also help with the data, the supplier pools and senior management approval. Together we can make this work and bring e-Auctions to bear as an accessible tool in the procurement professional’s toolkit.

Why do salespeople have bonuses?

The initial topic led to a random discussion in the local about why salespeople have large bonuses compared to other functions such as HR or IT? In the end, you could say why pay them bonuses just to do their job.

A salesperson might say it’s because they work longer hours and spend much of the time on the road doing unsociable hours. Or they might say that they are of crucial importance to an organisation, that without them the organisation collapses, although many roles in the organisation could say this. It might be that salespeople require a certain set of skills which can command the bonuses and they are not easily replaceable? These are all true to an extent but why would a fixed salary and a dedicated person not end up with the same results?

The reason is evidently more complex and employs a combination of factors.

Firstly we should examine the bonus, is it really a bonus? A bonus should be paid on top of your salary but what happens for salespeople, in many cases, is that some of the salary is given up and replaced by a bonus system. If they do not perform they get a salary which is less than someone of their skills and position would expect, almost a negative bonus. Only if they perform well do they get a salary which is augmented by an actual bonus. This is speaking from personal experience being involved with three different software companies all on wildly different bonus schemes yet the common factor was that the base salary was less than many of my successful peers in functionally different roles.

Secondly the bonus is meant to be a motivator to put the long hours in, especially when it is close to the end of a Quarter, financial targets need to be hit for the city and the companies financial standing upon which decisions may be made can be affected. This also brings in a level of pressure which other roles might not encounter.

Thirdly, in some ways, it is to protect the company itself, simple financial common sense. A salespersons job is directly linked to the money they bring in, more than any other role. A company might employ someone to bring in £300k to the business and in return for a £50k bonus. If they were on a fixed salary and did not hit the targets, paying them the £50k can be easily equated to the negative impact on the company’s financial position i.e. instead of £-300k, it is -£350k.

You could also say that the types of people sales positions attract are motivated by money. You could say that bonuses indicate to sales people that their job is never done, there is always the potential for more. There are possibly many other reasons for bonuses but the principal ones have been captured here.

Research has also shown however that money is a poor motivator. A raise in salary apparently only motivates people for a few weeks. It can create a bad culture, only working hard for the bonus and losing visibility on other factors. Bonuses can lead to jealousy and group bonuses can also lead to resentment if some people are not seen to be pulling their weight.

Also bonus systems are horrendously complicated to get right for all. Do you split the bonus by products, industries, applications or geography? You are almost certain of having a conflict between sales people at some point. And how do you include the crucial group element which is so important so the UK salesperson for instance passes on the lead to the salesperson in the US.

Applying bonuses to every position in the organisation will lead to a bad culture and does not look very sensible. It does seem that bonuses are more suited for salespeople than other functions but is there another way?

There are many different forms of motivation. We have seen in some companies giving time off as a reward can be a real motivator, a half hour at a time, and this has worked very well. Or you could look into training days, prizes, public recognition or maybe just a better office environment. Would this be enough for a salesperson? It certainly could be if the right person is found but how many of these exist? Maybe it is time for a change but we suspect the working formula for many organisations and people will be the same for many years to come, is that such a bad thing?

1 comment:

  1. I agree with several of the points made above - not the least of which brings up the idea that sales people and procurement people are not driven by the same personal or career aspirations. While it is appealing as a procurement professional (a good one if I do say so myself...) to think of earning bonuses for good savings or using auctions, I think plain old fashioned promotions and appropriate salary increases still make the most sense.

    In my opinion, the best way to maximize the use of auctions is to make sure people are educated about when they are the most effective negotiation strategy. Even the most wonderful things are not always the best answer: I adore good red wine, but not on my breakfast cereal. The shame is when an auction is not used simply because people are nervous, intimidated, unprepared, or the worst - LAZY! In order to run a good auction you have to have done your homework. The same is true for all contract negotiations, but auctions shine a light on the data and analysis.

    Do your work. Be brave. Auction the 'un-auctionable'.

    Kelly Barner